[OPE] RUPE, "The New Great Depression and India" [from Aspects of India's Economy No. 47]

From: Gerald Levy <jerry_levy@verizon.net>
Date: Mon Apr 06 2009 - 08:54:40 EDT

No. 47
(March 2009):

The New Great Depression and India

Over the last six months, a new Great Depression has enveloped the entire
world. The ruling circles worldwide and the international media have been
propagating that this Depression is the result of a mere financial crisis,
caused by irresponsible lending by banks to poor people in the U.S..
Accordingly, they began by claiming that within six months to a year, the
recovery would begin, thanks to government bail-outs and stimulus packages
of unprecedented size.
So rapidly did the crisis advance, however, that within weeks these claims
wore thin. Talk of a systemic breakdown now entered the language of the
ruling establishment itself. Even as a defensive George Bush asserted at the
G-20 summit that "The crisis was not a failure of the free market system",
his French and German counterparts were acid in their retorts. The German
finance minister declared to the German parliament: "The world will never be
as it was before the crisis. The United States will lose its superpower
status in the world financial system." "What we are seeing now", said
Raghuram Rajan, former chief economist of the IMF, "is capitalism in
crisis... but I do not see an end to capitalism."1
Inadequate explanations
Various explanations have been put forward in the media for the crisis,
mostly banal. The newspapers tell us that the crisis was the result of an
excess of 'greed'. But greed is hardly a new phenomenon. Indeed, orthodox
economics bases itself on the assumption that every individual is
limitlessly greedy, and that the pursuit of individual greed brings about
overall growth and greater well-being.
Another widely circulated and equally shallow explanation blames the US
authorities for failing to bail out the giant investment bank Lehman
Brothers in September 2008; Lehman's bankruptcy, it is claimed, caused
credit markets to seize up and the crisis to get out of control. Now this
explanation is heard less frequently, as it turns out that virtually the
entire US financial sector was actually insolvent, and required bailing-out.
Two other explanations offered are true, but incomplete. First, that the US
central bank, the Federal Reserve, kept interest rates abnormally low for a
long time, encouraging an explosion of debt and an unsustainable boom on
that basis. Secondly, that the Federal Reserve and other financial
authorities in the US, under the spell of neoliberal ideology, failed to
properly regulate the financial sector, and winked at what amounted to
financial pyramid schemes. These explanations give rise to two questions:
Why did the extremely well-informed authorities of the world's most
sophisticated financial system promote such a bubble economy? And how were
they able to do so?
Systemic crisis
The truth is that this is not merely a financial crisis but, more
fundamentally, a crisis of the capitalist system itself. For all the
complicated financial exercises and terms which cover the surface of this
crisis, at the centre of the crisis are contradictions which are inherent to
the capitalist accumulation process. The bloated growth of the financial
sector is in fact capitalism's attempt to postpone the effect of these
contradictions, whereas the financial crash is the reassertion of their
At the centre of the crisis too is the contradiction between US imperialism
and the people of the Third World. This is exemplified by the fact that the
consumption of the US, including its gargantuan military expenditure, is
being funded from the savings of China, other East Asian countries, and the
Gulf oil producers. Though US imperialism is still dominant worldwide, its
economic dominance has long been in decline, tending to make this parasitic
extraction ever more unsustainable. (Dogged insurgencies in countries under
US military occupation have played a significant role in further undermining
US hegemony, preventing it from achieving its strategic-economic aims,
forcing it to increase its military expenditure abroad, and deepening its
dependence on foreign inflows.) The waning of the US's economic and
political power too underlies the current crisis.
However, the pattern of trade in recent years (giant US trade deficits,
giant trade surpluses of certain Third World countries) and the perverse
pattern of financial flows (from the poor to the rich countries) have not
been brought about by the US elite on their own, but with the help of the
elites of the Third World; and the latter too have flourished
unprecedentedly therefrom. These patterns represent, in a sense, a compact
between the elites of different worlds against their people, who are the
losers in the entire scheme.
Purpose of production under capitalism is to accumulate capital
Evidently, there were powerful social forces driving the developments which
resulted in the boom and the collapse, and our search for an explanation
must extend to the nature of these forces.
Before turning to the financial crisis, it is important to emphasise a
central fact about capitalism: Capitalists are driven to accumulate more and
more wealth. However, the source of the wealth of the capitalist class is
the expropriation of surplus value from labour in the course of production.
As a result of their exploitation by the capitalists, the consumption of
workers is restricted. Hence built into capitalism is a contradiction
between, on the one hand, the poverty and restricted consumption of the
workers, and on the other hand, the tendency of capitalists to keep
expanding the productive forces as if their only limit were the absolute
power of the entire society to consume. This contradiction gives rise to
repeated crises of overproduction under capitalism.
For the capitalist the purpose of production is not to create use values but
to accumulate wealth; so once profits start declining because of inadequate
demand, the capitalist cuts back on investment and starts retrenching
workers. A general slowing of profits arises inevitably at some point as the
growth of society's productive capacity outstrips demand. At such a juncture
all capitalists cut back at the same time; their cutbacks further lead to
reduced demand; this reduces profits further, and thus triggers further
cutbacks - in a downward spiral of employment, demand, and investment. The
pursuit by individual capitalists of their individual profit thus leads
finally to suppression of social production.
In the era of competitive capitalism, once excess stocks had been run down
and enough value had been destroyed, capitalists would at some point find it
possible to make some profits by investing again, and would re-start the
whole cycle. But each crisis made clear that the capitalist class's
ownership of the means of production had become a barrier to the further
development of productive forces. The nature of production was increasingly
social; the further advance of productive forces would be possible only
under the social ownership of the means of production themselves. Only then
would production be freed from the requirement of accumulating private
wealth, and be instead directed to meeting, through the planned creation of
use values, the needs of present and future society.
Era of monopoly capital
This basic contradiction of capitalism is intensified in its current stage,
namely, monopoly capitalism, or imperialism, which emerged towards the end
of the 19th century. Industry in the world's leading economies was now
dominated by a small number of giant corporations commanding a growing
surplus. The problem for these firms was to find ways to invest this capital
at an attractive return. Periodically, no doubt, new stimuli to investment
did arise (and continue to do so: for example, the development of the
internet in the 1990s). But once a wave of investment satisfied the demand
that gave rise to it, investment slowed down, and stagnation set in. The
long-term trend was toward stagnation. Overcapacity and debts acquired
during the boom period continued to depress investment, as did monopoly
capital's resistance to accepting lower rates of return on its capital. The
internal logic of the system itself did not generate forces of revival. This
was most strikingly illustrated in the Great Depression, which continued for
more than a decade despite widespread unemployment, fall in wages, and
destruction of value.
In the 1930s, even as the capitalist world lay in the depths of the previous
Great Depression, the Soviet Union experienced rapid industrial growth.
People in the capitalist countries began to question why the investment of
the social surplus in their own countries was determined by the narrow
interests of financial speculators and industrial barons, rather than by a
social plan, when the latter could employ the entire workforce and increase
production. This idea posed a political challenge to the capitalist system.
The Depression saw the rise of progressive movements the world over to
overthrow the existing order and replace it with an alternative order.
Among the imperialist countries, the US failed to bring about a real
recovery with its much-trumpeted but actually limited New Deal. It was
German monopoly capital that succeeded in bringing about full recovery of
the German economy and full employment of its workforce, by resorting to
fascism and war. World War II succeeded in solving the problem of
unemployment and underutilisation of productive capacity in all imperialist
countries for some time, by mobilising the entire industrial capacity and
workforce for war, killing tens of millions of people, destroying productive
capacity, and creating demand for rebuilding all manner of physical assets.
Short of such horrors, capitalism has found no solution within itself for
its underlying crisis.
Resort to different means to overcome crisis
With the end of the War, excess capacity re-appeared, as did fears of
recession. Moreover, US imperialism felt threatened by the high regard
worldwide for the Soviet Union's role in the War, as well as by the surge in
support to communist parties in Europe. Against this background, the US
revived New Deal policies at home, and implemented the Marshall Plan to
rebuild Europe along welfare capitalist lines.
In one sense, however, peacetime never returned: well after World War II,
military expenditure continued to boost US demand, with regional wars in
Korea, Vietnam, and elsewhere, as well as the Cold War. Other forms of
government expenditure grew too. Further, the aggressive promotion of the
automobile industry and rampant consumerism sustained demand for a
considerable time (the growing army in marketing and retail added to this).
But finally, from the seventies, the US-led bloc of imperialist economies
turned increasingly to the expansion of the financial sector as a means of
stimulating the economy.2
The financial sector did so by expanding all sorts of debt and speculation.
Household debt for houses, cars, and consumer durables stimulated mass
consumption. Financial sector debt increased the flows of finance to various
speculative markets, hiked the prices of shares and real estate, and thus
stimulated construction activity as well as consumer spending by those whose
shares or houses had appreciated in value.
The financial sector itself created employment for a sizeable staff of
high-spending parasites. And government debt funded US imperialism's bloated
military expenditures, from Vietnam to Afghanistan. The US has been able to
expand its debt endlessly by borrowing abroad. As the US dollar has remained
the leading international currency, other countries have been willing to
lend to the US, and this has sustained the growth of its national debt.
However, even the high-spending US consumer could not prevent the US economy
from experiencing a steady, long-term slowdown, from growth rates of 4.1 per
cent in the 1950s to 2.6 per cent in the 2000s.3 Nor could similar rampant
financialisation prevent a similar long-term slowdown in all the other
imperialist economies.
The financialisation process, exploitation of labour, and parasitism
While the long-term slowdown of GDP growth persisted, the leading capitalist
economies were successful in bringing about another kind of turnaround.
After the mid-1970s recession, capital in the US and Britain embraced an
aggressive policy of labour-bashing, in which the smashing of the air
traffic controllers' strike in the US (1981) and the miners' strike in the
UK (1984-85) were major landmarks. The financialisation process, and the
freedom of capital to move across borders, further strengthened the hands of
Capital against Labour. These developments led to a rise in the share of
profits and the decline in the share of labour income from the early 1980s
to date.4 This shift, however, would ultimately aggravate the underlying
problem of demand.
While the financial sector has been able to sustain some sort of growth in
the imperialist economies, it cannot itself create any value. Value is
created in production. The financial sector creates and trades claims on
that value. By contrast, in a socialist economy most of the financial sector
vanishes without any damage to production and consumption. Thus the bloated
growth of the financial sector, and its appropriation of an ever-larger
share of the value created in production, represent the ultimate parasitism.
With the explosion of finance, the earlier structure of monopoly capitalism
underwent a change. As corporations became increasingly subject to the
threat of takeover by financial entrepreneurs, they were increasingly seen
as bundles of assets for speculative purchase and sale - as in the
burgeoning 'mergers and acquisitions', including 'leveraged buy-outs' by
financial entrepreneurs. Within capitalism, financial sector activities
became dominant.
Even as financialisation has sustained growth in the imperialist economies,
however, it has wreaked havoc in the rest of the world. In periods of
expansion of the imperialist economies, volatile flows of speculative
capital have flooded into Third World countries; in periods of downturn,
capital returns to the imperialist safe havens, above all the US. On their
way in, these flows lead to rapid growth in share prices and real estate
prices, and to a distorted, unsustainable growth based on elite consumption
in these Third World countries. On their way out, they lead to the collapse
of asset prices, a credit crunch, retrenchment, and fall in the value of the
currency. At such points these countries are able to get loans only on the
condition that they subjugate more of their economy to foreign capital (eg,
privatise assets such as oil or telecommunications, or remove restrictions
on foreign investments in the banking sector). Much of the Third World has
experienced such devastations by international speculative capital. The
greater the 'globalisation' of these economies, the greater their
vulnerability to such devastation.
Since the mid-1990s the US has witnessed two major booms. The first, known
as the 'dotcom boom', was fueled by the belief that the 'New Economy' (the
widespread computerisation of various business functions, and the
communications revolution, including the internet) would result in greater
productivity and a historic, sustained expansion. Real investment (i.e., in
physical assets) boomed, but even this was concentrated in the financial
sector. Share prices soared to absurd heights. The bubble burst in 2000, and
recession set in by 2001. However, US imperialism yanked itself out of the
recession in a few months by reducing its domestic interest rates to
rockbottom levels, deliberately pushing the expansion of bank home loans,
and expanding Government military spending. The dotcom boom, till then the
greatest financial bubble in history, was replaced and far surpassed by the
housing bubble. Total debt contracted by US entities nearly doubled during
the boom; it rose from 2.68 times GDP in 2000 to 3.46 times GDP in 2007.5
Said Stephen Roach, chief economist of Morgan Stanley, in 2003: "The Fed
(the US central bank) has, in effect, become a serial bubble blower."6
The huge tide of liquidity gushing from the US economy in the post-2001
period had the immediate effect of raising the rate of growth of the world
economy itself. By increasing demand in the US, it increased US purchases of
imports from the rest of the world. Further, with easy access to funds,
wealthy investors in the imperialist countries sought out high returns in
the Third World. Inflows of such funds into Third World share markets and
real estate markets led to relatively high growth rates in many Third World
countries, including India. The evaporation of these funds now is leading to
the sudden plunge of these same economies, and has deflated the puffed-up
boasts by rulers of India and other such countries that their economies had
now become world powers.
After the collapse of the dotcom boom, industry in the imperialist countries
had considerable unutilised capacity, and was at any rate wary of
undertaking fresh investment. So despite the relatively high growth of the
economy during the housing bubble, industry in the imperialist economies
chose to funnel its bumper profits to the financial sector rather than to
the creation of physical assets. (Thus, even two years after the US was
considered to have come out of the recession in 2001, jobs were refusing to
grow in the manner they do during a recovery.) In East Asia too, industry,
having suffered the 1997-98 crash, refused to invest. Thus the world economy
suffered low investment on the one hand, and rampant consumption by the US
economy on the other.
The contradiction between the expansion of the financial sector and the
stagnation of the underlying productive sector finally found expression in
the recent meltdown. The specific trigger for the recent financial collapse
was an 'innovation' of the financial sector in the US called 'securitisation'.
A bank would gather up bunches of loans it had made, and sell these bunches
to investors. That is, the investor would hold a piece of paper entitling
him/her to a share of the revenues that would come to the bank from a
particular bunch of borrowers. By this method, banks would recover from
these market investors the amount they had lent as home loans to others, as
well as fat fees, and would in this process be free to expand lending
further. These paper securities offered investors higher returns than other
places in which they could invest their money. But they were only the
starting point for a huge edifice of debt and speculation. Various other
securities were devised and issued by different financial institutions based
on grouping together the incomes of the original securities; and further
speculative bets centred on the risk of default by various groups of
borrowers. Those who bought all these securities borrowed huge sums to do
so. Finance boomed, and so did the economy based on this. According to some
estimates, in the US, roughly 80 per cent of the increase in employment and
almost two-thirds of the increase in GDP in the years before the crisis
broke stemmed directly or indirectly from the real estate sector.7
Since the 1980s, on the other hand, wages in the US (as also worldwide) have
been suppressed by neoliberal policies even as a minuscule elite has
accumulated unparalleled wealth. This wage-suppression would have undermined
consumption demand and led to a depression much earlier had mass consumption
not been sustained by the colossal expansion of household debt. As the
expansion rolled on, banks pushed loans to poorer and poorer sections (the
'sub-prime'). However, all that debt ultimately had to be serviced out of
income, and the stagnation in the incomes of the working people meant that
they could not sustain debt servicing. This led to a rising rate of defaults
on home loans. In turn, the giant edifice of finance and speculation based
on that debt came crashing down. That is, the underlying contradiction of
capitalism reasserted itself.
Export of savings from Third World to the US
Equally at the heart of the current crisis is the relation between
imperialism, particularly US imperialism, and the Third World. One important
aspect of this relation in recent years is the large capital inflows from
Third World countries - China, other East Asian economies, and the Gulf oil
exporters - which have sustained the US expansion. These countries
accumulate large trade surpluses; their central banks invest these surpluses
in the US, mainly in US government debt instruments. These flows bridge the
giant US current account deficit (i.e., the deficit the US runs on trade in
goods and services). These flows of capital to the US not only fund the US
current account deficit; they are so large that they even fund the giant US
investment abroad.8 And while foreign investment in the US is in low-return
US government debt, US investment abroad earns high returns. As a result the
US, despite being a huge net debtor, earns more on its foreign investments
than it pays out on others' investments in the US. In the words of Kenneth
Rogoff, former chief economist of the IMF, "This enormous subsidy to
American taxpayers is, in many ways, the world's largest foreign aid
program."9 (Part of the US investment abroad is, of course, in placed in the
Third World. Third World central banks like India's RBI have been compelled,
in turn, to invest some of this incoming flood in US government debt - a
multiple bleeding.)
Why then do countries like China, other East Asian countries, and the Gulf
oil exporters buy US government debt? This must be seen first in the context
of US global domination (an important element of which is its overwhelming
military supremacy). On this basis the US has ensured the continuing reign
of the dollar as the leading international currency, and therefore ensured
that it makes up the bulk of the foreign exchange reserves of central banks.
The US has also used its clout as the world's biggest importer to lay down
terms to the world's biggest exporters.
At the same time, the present pattern of trade and financial flows also
benefits the elites of certain Third World countries. Booming exports (on
the basis of harsh exploitation of workers) yield them rich profits.
Moreover, the flood of funds internationally helps them in several ways.
Foreign capital flowing into Third World countries boosts upper-class
consumer demand and corporate profits; and in a climate of easy and cheap
funds, global investors are willing to bankroll the global dreams of big
Third World capitalists like the Tatas and Ambanis. Even as the fact of
imperialist exploitation is as stark as ever, its contours and patterns are
The savings which certain Third World countries are exporting to the US are
made possible by suppressing the consumption of their own working people
(i.e., paying workers low wages, taxing and underpaying peasants). The most
striking instance of this pattern is that of China, which saves a staggering
half of national income in this fashion. So high are China's savings that
despite having the world's highest investment rate it has surplus savings to
export. In the case of other developing countries, the surplus savings which
they are exporting are not the result of rising savings, but falling
domestic investment under the reign of neoliberal economic policies. Indeed
"there is a global investment shortfall, with investment trending downwards"10
even during the preceding period of high growth. Thus the relation at the
centre of the world economy is one of parasitism.
US imperialism on the decline
However, US imperialism is well past its heyday. Its last great gamble was
to shore up its waning economic power by exercising its overwhelming
military power. Its aim was not only the sheer plunder of oil wealth, but
control of this strategic resource, and re-assertion of the dollar hegemony
on which its fortunes depend. That exercise, planned to be swift and
surgical, has got bogged down instead in unexpectedly strong and dogged
national resistance in the occupied countries, leaving the US to foot a
larger and larger military bill.
Now the US has been forced to re-focus its political energies entirely on
rescuing its sinking economy, for which it needs to maintain continued
inflows of capital. Even as it keeps up the grand front of global
leadership, it is forced to request the cooperation of other powers in
various spheres (the new Secretary of State's first foreign trip was to
China, to request it to continue investing in US government debt; there she
had to put the US's pet 'human rights' theme against China on the back
burner). The various international economic bodies which the US dominates -
the IMF, World Bank and World Trade Organisation - are reeling under the
impact of the current crisis, and are in no shape to take command. The funds
of the IMF and World Bank are puny compared to the scale of loan
requirements. As different countries race to shore up their domestic
economies against the international storm, the WTO's 'globalisation' agenda
has been sidelined. Most importantly, the reign of the dollar as the leading
international currency, which both rests on US hegemony worldwide and helps
maintain that hegemony, will come under increasing question now because of
the US's own efforts to spend its way out the crisis.11 As Rogoff points
out, "A large expansion in debt... will certainly make it harder for the US
to maintain its military dominance, which has been one of the linchpins of
the dollar."12
As the crisis deepens, the strains and conflicts among different imperialist
powers, as well as other capitalist countries such as China, will sharpen,
and new blocs may emerge. Any US efforts to reduce its huge trade deficit
would require a reduction of the market of other countries, which these
countries would not give up without a fight. A period of contention for
markets looms ahead.
The gravity of the present crisis is comparable only to that of the Great
Depression of the 1930s. As such it has rung the death knell of the
neoliberal era. Even though neoliberal ideology will survive in a modified
form, and will continue to oppose the efforts of the other main school of
ruling class economics (Keynesianism) to revive growth, it cannot in the
near future enjoy the unquestioned supremacy it once had. What will replace
undiluted neoliberalism, however, is not yet clear, and there is at present
confusion and gloom among the ideologists of the ruling circles in the
leading capitalist countries.
Capitalist states have once again openly13 embraced certain Keynesian
instruments - such as that the State boost aggregate demand, and thus spur
private investment, by deficit spending - but without accepting Keynes'
darker insights into capitalism's inherent tendency to break down. Thus,
while Keynes, following the logic of his theory, was forced to acknowledge
the need for "a somewhat comprehensive socialisation of investment", clearly
such a level of socialisation is incompatible with capitalism. The prospects
are bleak for capitalism quickly emerging from the present crisis with the
use of isolated Keynesian instruments.
Environmental crisis
Moreover, in the Keynesian framework, all that matters is that spending
increase, workers get employment, and growth revive/continue. Keynes not
only explicitly upholds the existing social order, but emphasises that what
is being produced and consumed is of no relevance. However, under the reign
of capitalism and more particularly under imperialism, the character of
growth has become a more and more pressing question for the survival of
humanity. Even as the world crisis of the capitalist accumulation process
has come to a head, world crises created by the capitalist accumulation
process are developing rapidly.
On the one hand, the production of the most basic necessity of life, food,
is under threat - from lack of investment, from diversion of land to
non-agricultural uses and agricultural output to non-food uses (eg.
biofuel), and from serious degradation of the environment. On the other
hand, the nature of the present economic growth is itself environmentally
unsustainable. The addition of the better-off sections in some Third World
countries to the category of 'world-class consumers' is bringing out just
how unsustainable this is. If, by some magic, consumption in the Third World
could be raised to that in the imperialist countries, and along the same
pattern, it would multiply the consumption of natural resources and hugely
aggravate the production of waste and environmental degradation.
This pattern of predatory and destructive consumption has been created by
monopoly capitalism in order to create markets and thereby to facilitate its
own accumulation of capital. It has nothing to do with people's physical
needs, their sense of happiness and security, or the development of their
capabilities; all these can best be fulfilled with a radically different
pattern of consumption. However, that would require a different social
system, one based on production for people's needs, namely socialism.
Impact on the Third World
The attention of the world is focussed on the dramatic developments and huge
bail-out packages in the imperialist countries, and indeed the working
people of these imperialist countries are set to experience great pain. But
the greatest immediate impact of this crisis will be suffered in the Third
World. In recent years economists, columnists and political leaders have
propagated the notion that Third World economies have 'decoupled' from the
developed world, and would continue to grow even as the latter stalled.14
The decoupling theory has now been buried. In those Third World countries
which have undergone relatively greater industrial development, the fall in
exports, as well as the fall in domestic demand (due to falling capital
inflows), are leading to very large-scale retrenchments. Even further, the
vast Third World peasantry are being ravaged by a crash in agricultural
commodity prices (as demand shrinks, and as speculators pull out their
investments in order to make up for losses in other financial markets). All
this will only worsen the long-standing famine of agricultural investment,
and in turn the world food crisis.
While it is theoretically possible that these countries will re-orient their
economies to boost domestic demand and thus generate a market for continuing
industrial growth, the political economy of these countries (i.e., the
nature of class rule in them, how the social surplus is generated,
appropriated and re-deployed) poses an obstacle to such a reorientation. For
such a re-orientation would require a major transfer of resources to the
working people, which would be opposed by the ruling classes.
This period of churning and decline of US hegemony, on the other hand, will
offer greater opportunities for the advance of people's struggles and forces
fighting for an alternative social order both in the advanced capitalist
countries and even more within the Third World. This, even as the crisis
brings home to the people of the world the irrationality and barbarism of
capitalism. The emergence of militant anti-State upsurges in Greece, the
general strike of French workers, the demonstrations in Iceland culminating
in the downfall of the government, the occupation of a factory in Chicago by
the workers, and demonstrations by workers in Russia and China are
harbingers of impending class struggles.
Indian bubble bursts
India's GDP grew during 2003-08 at its fastest pace in any five-year period.
Its rates of investment soared to levels comparable to East Asian economies.
Its sharemarket values more than quadrupled. Bankrolled by international
finance, India's private corporate sector began acquiring firms overseas.
And the country's business and political elite began to preen themselves as
the ruling class of a new economic superpower.
In the space of a few months everything has changed. GDP growth is falling,
and the manufacturing sector has gone into a tailspin; the best-known Indian
firms are making losses and cancelling planned investments; the sharemarket
has crashed; foreign acquisitions are proving to be albatrosses round the
necks of many corporate firms; and the smugness of the ruling elite has
The Indian economy, as it has historically developed, lacks a powerful
internal dynamic such as would emerge from a healthy, widely dispersed,
domestic demand. Especially since the 1980s, it has turned increasingly to
inflows of foreign capital to boost its growth. Hence it is systemically
vulnerable. The last time the flow of foreign capital (in the form of loans)
dried up, in 1990-91, the Indian economy went into a tailspin. It was forced
to undergo IMF-directed 'structural adjustment' in order to get fresh loans.
Since then, its vulnerability has increased manifold as it has 'globalised'
itself, in the spheres of both trade and finance.
India's recent bout of high growth (2003-08) was mainly the result of the
sea of liquidity from the US. A flood of foreign speculative capital entered
India through various routes, with net capital inflows rising to a peak of
$108 billion in 2007-08. These inflows fueled a steep rise in bank lending
to middle and upper class consumers for houses and automobiles. This in turn
fueled demand in a whole range of industries. Inflows of foreign speculative
capital blew large bubbles in the share market and the real estate sector,
resulting in Indian industrial tycoons and real estate barons being valued
(on the basis of that speculation-driven rise in share and property prices)
as among the world's richest men. Industries catering to elite consumption,
from airlines to consumer durables, swelled. All these industries are
capital intensive and create little employment (with the partial exception
of construction).
Meanwhile the sectors that employ the overwhelming majority of the
workforce, and that supply most of the items of mass consumption, namely,
agriculture and small scale industry, were starved of investment and even
credit for working capital; they stagnated or even retrogressed during the
corporate sector boom. Thus employment and wages stagnated for a long time
into the expansion. When they finally began to rise following a sustained
construction boom, the shortage of food (the result of under-investment in
agriculture), combined with speculation in agricultural commodities, led to
high price rise, snatching away much of the income gains of working people.
After the international bubble-economy burst, so too did India's bubble
economy. It is anticipated that net capital inflows will fall to $10 billion
in 2008-09 - a drop of 91 per cent. The Bombay Stock Exchange sensitive
index (Sensex) fell from a high of 20,873 on January 8, 2008 to a low of
8,541 on November 20, 2008, and has remained in the latter range since.
Monthly industrial growth rates have tumbled from 9.8 per cent in August
2007 to -2 per cent in December 2008.15
The Indian rulers see this as a crisis exclusively of private corporate
sector liquidity and profitability. Thus they have taken a range of steps to
ensure the flow of bank funds to the corporate sector to compensate for the
reduction of foreign inflows; further relaxed restrictions on foreign
institutional investment (FII) and foreign direct investment (FDI) in
different sectors; extended tax concessions and export subsidies; forced the
public sector financial institutions to prop up share prices by making
purchases; boosted demand for the real estate and auto industries by forcing
public sector banks to make home loans and auto loans cheaper and more
easily available; and reduced the price of aviation turbine fuel steeply to
aid private airlines (in contrast to the moderate reduction in diesel and
petrol prices). There are only two measures of direct spending in 2008-09,
and both were paltry: Rs 200 billion of additional Central Government
spending, and an increase in the limit that state governments could borrow.
However, in an unremittingly grim climate for profits, these measures are
unlikely to trigger a fresh investment boom by the private corporate sector,
especially as the last boom will have left firms with excess capacity.
Rather, the funds and concessions will be used by large firms to shore up
their shaky - in some cases perilous - financial position (for example, many
of the real estate firms may in reality be insolvent, once one factors in
the fall in land prices). At the same time, these measures will reduce tax
revenues, divert bank credit from the sectors which are in dire need,
subsidise luxury consumption (such as air travel and automobiles), and
permit further foreign control in sectors hitherto restricted.
The high growth of recent times was in itself of no benefit to the people,
since the jobs and incomes it provided in a miserly fashion with one hand it
took away with the other. Moreover, growth was based on further and further
skewing of the economy toward elite demand, powered by foreign inflows; this
cannot be sustained forever. (No doubt, the rulers and their economists
imagined India's economy, and even its political life, could permanently
'decouple' from the condition of the majority of its people.) Finally, built
into the pattern of this rapid growth were all sorts of undesirable,
wasteful and even harmful economic activities, such as the proliferation of
automobiles and air travel, urban infrastructure for automobiles, corporate
health care, organised retail, corporate agriculture, real estate usurpation
of agricultural land, privatisation of water and other natural resources,
and so on.
While the people as a whole did not benefit from this pattern of growth, the
collapse of that growth will deal an immediate blow to many - in the form of
retrenchments of workers and depressed agricultural prices for peasants.
Hundreds of thousands of workers are being retrenched in the export sector -
textiles and garments, diamond polishing, leather goods, tourism, etc.
Lay-offs and retrenchments are also under way in various sectors catering to
elite and middle-class demand, such as automobiles, hotels, airlines,
consumer durables, and most importantly construction. The producer prices of
agricultural commodities, which only seven or eight months ago were soaring,
are now set to fall with the slackening of demand and the transmission of
international price signals to India; the peasantry is in for another long
spell of depressed prices. (Yet the long-term trend of poor growth of
agricultural production, and the grip of private trade over agricultural
commodities, have led to prices of food remaining high; in fact, food price
inflation has even been climbing for the last several months.) As
near-insolvent financial institutions in the West attempt to shore
themselves up by selling off their investments in the Third World, capital
outflows from India have risen. The rupee has fallen from Rs 39.37 per
dollar in January 2008 to nearly Rs 52 today.
However, what this collapse underscores is that this growth was in itself
unviable. The fact that 'growth' generated such meagre employment at its
peak will limit the extent of damage that its collapse can bring about.
Moreover, the potential cancellation of some major investments - such as the
land-grabbing special economic zones (SEZs), or the employment-destroying
projects for organised retail - will in fact benefit the people. The
reduction of air traffic would be altogether a good thing. And the solution
to the problem of the unremunerative nature of Indian agriculture is not to
create another speculative boom.
Directly contrary to the concern of India's rulers, the concern of the
Indian people is not to find ways to attract fresh flows of foreign capital
or reflate the corporate bubble economy. Rather these schemes are directly
against their interest. The people's interest lies in making immediate
demands such as the following: State investment in, and support to,
agriculture and related activities; credit, financial support, and other
necessary assistance (inputs, marketing) to small non-agricultural producers
(small and micro industry, handicrafts/handlooms); a massive increase in
direct employment generation by the State; the universalisation of the
Public Distribution System (in three senses: actual coverage of all areas
and families; provision of the full requirement for a family; and inclusion
of all basic needs, not merely of cereals); universalisation and a decent
level of public health care; construction of adequate schools with
employment of a full contingent of qualified teachers; ensuring of proper
housing for the urban masses; and many other such measures.
At the same time, the people's interest lies in demanding that the country's
economy be no longer subjugated to the flows of foreign capital, or oriented
to external demand or luxury demand at the cost of genuine national and
democratic development. And finally, as the long-term paucity of employment
persists, peasants' demand for access to land and other rural assets for
cultivation must come strongly to the fore.
Of course, this amounts to demanding a change of the political economy
itself. In the present times, as the global crisis discredits the capitalist
system itself, the demand for such a change will win a wider and wider
circle of adherents in these countries. It is the role of sincere students
of political economy to explain to the people the real causes of the current
crisis, and the need to struggle for a political economy that can direct the
country's social surplus to meet the real social needs of the present and

Our thanks to Nirmal Chandra and Jacob Levich for their insightful comments
on the first draft.


1. Interview in Asian Age, 22/12/08. (back)
2. Harry Magdoff and Paul Sweezy, Stagnation and the Financial Explosion,
1987. (back)
3. John Bellamy Foster and Fred Magdoff, "Financial Implosion and
Stagnation: Back to the Real Economy", Monthly Review, December 2008. (back)
4. Ellis, Luci and Kathryn Smith, "The global upward trend in the profit
share", BIS Working Papers no. 231, 2007, and International Labour Office,
Global Wage Report, 2008-09 confirm the downward trend in wage share. (back)
5. US Federal Reserve Flow of Funds Accounts, cited in Harish Damodaran,
"Getting 'real' about financialisation", Hindu Business Line, 6/10/08.
6. "Endless bubbles", 20/6/03. (back)
7. Joseph Stiglitz, "Will the dam break in 2007?", Project Syndicate, 2006.
8. In 2007, of gross capital flows into the US of $2.1 trillion, $731
billion went to fund the current account deficit; US investors recycled $1.3
trillion of these inflows as investments abroad. Kristin Forbes, "Underlying
determinants of global currency usage", Peterson Institute of International
Economics, 2008. (back)
9. "Betting with the house's money", Guardian, 7/2/07. Moreover, as Krugman
notes, "The saving grace of America's situation is that our foreign debts
are in our own currency. This means that we won't have the kind of financial
death spiral Argentina experienced, in which a falling peso caused the
country's debts, which were in dollars, to balloon in value relative to
domestic assets." New York Times, 19/1/08. (back)
10. Rogoff, op. cit. (back)
11. Purchasers of US government debt are increasingly worried that the
runaway growth of such debt will lead to a steep fall in the dollar and thus
in the value of their holdings. (back)
12. "America will need $1,000 billion bail-out", Financial Times, 17/9/08.
13. No doubt, the US was already practising a type of Keynesian remedy by
stealth since 2001, by running up budget deficits, even as it paid lip
service to neoliberalism. (back)
14. At the same time they ascribed any improved growth in the Third World to
greater 'globalisation' - which would imply greater integration, and hence
correlation of growth rates, with the developed countries. (back)
15. In fact, as a result of increases in interest rates and a slowing-down
of consumer lending by banks since the latter half of 2006, industrial
growth rates had already been sliding from the start of 2007 - an indication
of how heavily industrial demand depended on cheap and easy consumer credit.

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