The First Professor K.K.Subrahmanian Memorial Lecture
Thrissur, October 16, 2012
Let me, at the outset, thank the organizers of this First Lecture in memory of Professor K.K.Subrahmanian, for inviting me to deliver the Memorial Lecture.
I had the privilege of knowing KKS as he was affectionately known while I spent a year in the Centre for Development Studies in 1976. I had already heard of him. In subsequent years, I learnt a great deal by studying his painstaking and careful empirical work on the key issue of foreign direct investment in India. KKS’s work was not only of high quality in terms of its empirical content. It was also informed by a theoretical perspective firmly rooted in the principle of national technological self-reliance. He challenged, especially in his later years, the neoliberal orthodoxy which saw FDI as both indispensable to India’s economic growth and invariably beneficial to the Indian economy. What was a broad consensus up to the early 1970s on the limited role that both international trade and FDI could play in Indian development was being challenged by the work of early neoliberals such as IMD Little and James Mirleesin their OECD manual on project evaluation and the work sponsored by OECD to promote free trade such as the Little, Scitovsky and Scott volume of 1971. By the end of the 1980s and the beginning of the 1990s, many economists in India had given up their earlier healthy scepticism concerning the welfare and development implications of the unfettered operation of markets and their recognition of the importance of the role of the State in economic development. Some, in marriages of convenience, had overnight turned into vigorous ‘free-marketeers’! But KK was not one of them. He remained steadfast in retaining a critical perspective on the pros and cons of foreign investment in Indian development. He also remained committed to the perspective of self-reliant technological development of India and recognized the key role that the State and its policies would have to play in achieving such development. It is a privilege for me to deliver the First Memorial Lecture in the name of such a principled economist, who remained progressive and pro-people in his outlook throughout.
The broad theme I have chosen for this Lecture is ‘India and the Global Capitalist Crisis’, a theme that I believe would have been of considerable interest to KKS.
The Global Capitalist Crisis
The current global recession- now admitted as severe by even the ruling classes in the advanced capitalist countries, to the extent of calling it the ‘Great Recession’, though the dreaded D-word, ‘Depression’ is studiously avoided by them – began in 2007, with the US economy officially going into recession in the last three months of 2007. It shot into prominence with the collapse of the Lehmann Brothers in September 2008. More than four years later, the economic and financial crisis of global capitalism is still with us. It has now reached a stage where, instead of a slow but sustained recovery, the capitalist world economy is seen as most likely to end up with a serious second downturn, widely referred to as the ‘double dip’ recession. What this prolonged crisis has done is to expose the absurdity of the arrogant claim made by capitalist ideologues at the time of the collapse of the Soviet Union in 1991that the future of mankind lay with capitalism. The past two decades have demonstrated that capitalism cannot solve any of the problems facing humanity from poverty to unemployment to inequality to corruption to the destruction of the planet’s climate and its natural resources. Worse, imperialist globalization of the last two decades has impoverished the vast majority of the world’s working people and the poor countries while massively further enriching a tiny, super rich minority of the world’s population, some of whom are located in the world’s poorer countries. The crisis has had serious implications for the Indian economy and for the working people of India, slowing down growth and worsening unemployment and poverty, even while inflation continues to devastate the lives of people and the agrarian crisis shows no sign of ending with lakhs of farmers committing suicides and stagnation in output and productivity. In this Lecture, we will trace, in outline, the major developments in the world capitalist economy over the past two decades and more, and briefly discuss their implications for the economic strategy pursued by the ruling classes in India as well as their consequences for working people.
The Rise of Finance Capital
Following a long period of relatively rapid economic growth (of 5 per cent per annum compound) from the end of the second world war in 1945 till about 1973, the world capitalist economy entered a period of relatively much slower growth from the recession of 1974-75. This was the beginning of the period of the rise to dominance of finance capital. The enormous profits accumulated by the giant transnational corporations over the long boom, the rise in deposits in the banks in the advanced capitalist countries from the investments made by the OPEC (Organization of Petroleum Exporting Countries) and the big oil companies that benefited from the huge rise in the price of petroleum in October 1973, and the savings of working people in the advanced capitalist countries as they approached retirement that were put into mutual funds, pension funds, provident funds and so on –all these led to an enormous accumulation of finance and thus liquidity in the international economy. Finance capital that thus emerged in a big way from the mid/late 1970s onward wanted to break down national barriers to movement of finance on private account across national borders. This was the beginning of the present phase of financial globalization that has caused so much havoc around the world. Simultaneously, the advanced capitalist countries, especially the USA and the UK, under Reagan in the US and Thatcher in the UK, put in place policies with three objectives:
· to weaken the socialist world by initiating an aggressive arms race forcing the USSR to spend on defence by diverting resources which would otherwise have been spent on meeting the rising cultural and material needs of people
· to deal with the crisis of slow growth and high inflation – ‘stagflation’ - by attacking and breaking the trade union movement, the iconic instances being Reagan’s breaking of the unions in the civil aviation sector in the US and Thatcher’s attack on the militant workers’ unions in the mining sector of the UK economy.
· to pass the burdens of the economic crisis in the advanced countries on to the developing countries through trade and debt policies, culminating in the third world debt crisis of the 1980s and after, and the Uruguay round of trade negotiations that led to the highly iniquitous WTO agreements of 1995 and after.
Financial Globalization and India
The rise to dominance of finance capital had important consequences for the developing countries including India. On the one hand, by strengthening the grip of imperialism on the third world through debt and trade policies, it considerably reduced the space for autonomous policy making in the third world. By weakening the socialist countries and ultimately contributing to the collapse of the East European and Soviet economies by the end of the 1980s, imperialism weakened the third world further, as the bargaining power of the latter declined with the decline of the advanced socialist economies and their dependence on the advanced capitalist countries for technology, markets and finance deepened. Added to this was of course the class character of most third world regimes that were unwilling to raise resources for development by taxing the rich but happy to borrow
internationally, utterly indifferent to the burdens this would imply for their own working people. But there was another, somewhat contradictory implication of financial globalization for some countries of the third world. The larger ones, like India, with a fairly large domestic market, an educated work force large in terms of absolute numbers even if very small as a proportion of the population, and some degree of development of financial infrastructure, were able to attract financial flows, provided they were willing to accept the conditions set by international finance capital. Further, the rise of the Internet and the revolution in information and communication technology opened up some possibilities of earning foreign exchange without running into the kind of opposition in the advanced countries that large scale immigration would have invited, since the service providers could be located in India while the clients were in the advanced capitalist world.
India had already been softened up by a large IMF loan provided in 1981. By the end of the 1980s, India had seen a decade of rapid economic growth financed by large scale government spending, based on both domestic and international borrowing. By 1991, the strategy of borrowing to finance growth while liberalizing imports led to both a crisis of budgetary resources and a crisis in the balance of payments, worsened by the developments in the Persian Gulf and capital flight from India. India was now ‘ripe for the taking’. With the setback to socialism in Eastern Europe and USSR, the leaders of India’s capitalist path of development moved toward a much closer collaboration with foreign finance capital, and the era of neoliberal reforms began in 1991.
Neoliberal India: The track record
It is now more than 20 years since India began implementing the neoliberal policies of liberalization, privatization and globalization (LPG, for short). What have been the consequences?How have India and Indians fared during the two decades of neoliberal reforms?
First, the annual rate of growth of the gross domestic product (GDP) of the economy was already close to 6 per cent per year from the mid 1980s. Between 1991 when the reforms were accelerated, widened and deepened, and 2003, the average annual growth rate of GDP was no higher than in the period from 1985 to 1990. However, from 2003-04 to 2007-08, the GDP grew more rapidly at about 8 per cent. With the global economic crisis of 2008, the growth rate between 2008-09 and 2011-12 is not likely to exceed 7 per cent by much.
One can argue that even an average of 6 to 7 per cent growth rate of GDP is impressive when many countries, including the developed capitalist countries, are growing at much lower rates and only China is growing at between 9 and 10 per cent per year for over three decades now. The issue, however, is not just the rate of growth, but the nature and composition of growth and its implications for different socio-economic classes. There are major concerns in this regard.
First, it is the service sector that is growing most rapidly. The share of the service sector in India’s GDP is now close to 60 per cent. The secondary sector has grown at much lower rates than the service sector and has also shown instability. Its share in GDP is only around 25 per cent, much lower than in China. The share of the primary sector –agriculture and allied activities, forestry and fishing, and mining and quarrying – has declined to somewhere around 17 per cent.
Second, while the decline in the share of the primary sector in GDP is to be expected as an economy modernizes and industrializes, the point to be noted with concern is that the share of the labour force in the primary sector, at almost 50 %, is much higher than its share in GDP. By contrast, services sector contributes close to 60 per cent of GDP, but its share of employment is less than 30 per cent.
Third, the last two decades have seen a huge and continuing agrarian crisis, with over 250,000 farmers committing suicide in just the decade from the late 1990s to the late 2000s. Growth in agriculture and in food grains has been the lowest since independence during this reform period, with the annual growth rate being just 0.6 per cent between 1994-95 and 2004-05. The recovery since 2004-05 has not been steady nor is it sustainable with present policies.
Agriculture and the rural economy have been devastated by neoliberal policies that have:
· Slashed subsidies to agricultural inputs including fertilizers, pesticides, credit, energy and transport, leading to sharp increases in input costs
· Removed restrictions on imports of agricultural produce, causing both a collapse of prices for farm produce at certain times and greatly increased price fluctuations throughout
· Reduced the supply and increased the costs of bank and cooperative credit to agriculture and allied activities
· Cut back on development expenditure to meet the demands of foreign finance capital for low budget deficits, in the process weakening rural infrastructure, farm extension, farm research and halting the expansion of irrigation critical to agricultural growth
· Weakened food security by imposing a targeted public distribution system, excluding millions of the poor from access to food at affordable costs.
Fourth, the growth in employment during the reform period has been smaller than in the decade preceding the reforms. Moreover, practically all the increase in employment over the last two decades has been in informal jobs that are not only often at very low wages, but carry no welfare benefits, are completely insecure with no protection for workers, involve long working hours and deny workers the right to form unions and fight for better wages and working conditions. All the increase in manufacturing productivity, brought about by rapid mechanization, has gone to swell profits while wages remain subdued. For instance, between the mid 1980s and mid 2000s, the share of profit in value added in organized manufacturing, for instance, has gone up from around 40 % to around 80 %. On top of the rural and agrarian crisis and the crisis of massive and increasing unemployment, we have had very high rates of inflation, especially in food articles and in some other essential commodities as a result of deregulation, indiscriminate opening up of the economy, promotion of futures markets and unbridled speculation.
Fifth, the reforms have led to a much greater integration of the Indian economy with the world capitalist economy. For instance, the combined share of exports and imports in the Indian economy in India’s GDP was only 14 % in 1991. It is now practically 50 per cent of GDP. In addition, because the reforms allowed free entry and exit of foreign finance capital, there is a much greater degree of instability in the economy, with foreign institutional investors bringing money into the country to make quick and huge profits in Indian stock markets and taking them out quickly. While foreign capital makes huge profits in this manner by speculating in the stock market, there is no benefit to the Indian economy as no wealth is created by trading mostly in already existing shares. But the unregulated entry and exit of foreign finance capital only causes great instability in the financial and currency markets and the integration of India’s economy through trade and capital flows makes us far more vulnerable to external shocks emanating from any part of the world capitalist economy.
All evidence, from the national sample surveys, the national family health surveys and various other surveys done across the country, shows that the reforms have not made a significant impact on the depth and severity as well as the wide spread of poverty, even though the government often claims the contrary. There has been no significant reduction in malnutrition, and the indicators even show a worsening in some parts of the country and among socially and economically vulnerable sections
Global Crisis: India’s Rulers in Panic Mode
With the current global economic crisis showing no sign of ending soon, the Indian economy is in for rough weather. Neoliberal policies of the last two decades have made the economy more vulnerable to the global crisis. We have seen the value of the rupee in relation to the US dollar fall rapidly in recent months, and in recent weeks, desperate measures by the government to halt the slide. The global recession has led to India’s export growth being halted, and recently, turning negative. Meanwhile, the rapid rate of import liberalization since 1991 is causing a serious trade deficit. With remittances from Indians abroad not growing to make up the gap, and with footloose finance capital exiting India rapidly, the global capitalist crisis has already led to a slowing down of the growth rate. In panic, our rulers want to offer more and more incentives to foreign finance capital to attract them into the country.
In recent weeks, the government of India has clearly pressed the panic button and announced a series of measures with the sole objective of pleasing foreign finance capital and in the bargain hoping to raise the ‘animal spirits’ of large Indian capital. In complete violation of the norms of parliamentary democracy, the government has permitted FDI in retail trade when the overwhelming majority in parliament opposed the move in this direction in October –November 2011. It must also be noted that theParliamentary Committee on FDI, including its Congress members, has unanimously rejected multi-brand FDI in retail. This violates an assurance given by the then finance minister on the floor of the parliament that the government would move on FDI in multi-brand retail only after obtaining a political consensus. Further, two key provisions in the Union Budget of 2012-13 are being reversed. The question of General Anti Avoidance Rules (GAAR) has been referred to what one may, without intending personal offence, call a ‘slot machine’ committee, where you will get the result you want as you would get the music you want from a juke box! The whole thing is in cold storage, and investors have in effect been assured that all is fair in the game of tax evasion. Likewise, efforts are under way to annul the effect of legislation passed by parliament intended to check tax evasion through a measure that retrospectively amended the Income Tax Act, and to negotiate with the concerned business entity soft terms that would minimise or altogether eliminate its tax liability. Steps to raise FDI caps in civil aviation and insurance have been announced, and foreign airline companies have been allowed to hold and raise stakes in Indian airline companies. Pension funds are to be privatised, and FDI allowed as well. In effect, further privatization and ‘denationalization’ of the financial sector in the sense of enhanced participation of foreign business entities is being rapidly pushed. Of great concern is the fact that, while none of these measures has majority support in parliament, a government that is de facto in a minority status, is going about announcing all these ‘reforms’. It is a scenario eerily reminiscent of 1991-96 when too the minority government with NarasimhaRao as prime minister and Manmohan Singh as finance minister pushed through major neoliberal measures that had not found a place even in the Congress party’s election manifesto in 1991.Where is the Indian economy, and its formally democratic polity, going?
What does the future hold?
It is here that the events in the advanced capitalist countries become very relevant. Following the financial crisis of 2008, governments in the West bailed out the big financial firms, the very firms that had been at least partly responsible for the financial meltdown. While this saved the financial giants, the governments became heavily indebted in the process. Today, several countries in Europe –Greece, Ireland, Spain, Italy, Portugal and so on, the list is growing –are imposing severe austerity on their working people to repay financiers who had lent them money to bail out the banks earlier. In the US, the long crisis has led to real (not the official) unemployment rates well into double digits. It is much worse in countries like Greece and Spain, with youth unemployment rates close to 50 % in Greece. All this is causing massive protests by working people.
The period since the onset of the current global crisis has seen increasing anger among working people in the developed capitalist countries against the financial elite and the governments seen as pampering them. People’s protests have taken different forms. In recent months, a spectacular protest movement has emerged: The Occupy Movement. It began initially in New York where protesters occupied the headquarters of global finance capital: Wall Street, demanding that investment banks and other financial corporations who had caused the financial crisis of 2008 with their reckless operations and speculative gambles should be brought to book and not rewarded with bail-out funds as had happened in the US. The movement then rapidly expanded, not only geographically, but also in terms of its agenda and its demands. From ‘Occupy Wall Street’ (OWS), it became a more general Occupy movement.
The movement spread not only to many cities and smaller towns in the US and elsewhere, but attracted an entire cross section of society, including students facing severe loan repayment problems on educational loans, home owners facing foreclosures on their home mortgages, unemployed persons laid off in the wake of the economic crisis, poor people of all races protesting cutbacks in welfare benefits and so on. The anger of the people was not only at their own plight because of the nature of the economic system that had forced them into unemployment or unsustainable debt or giving up their desire to pursue formal education. It was also at the fact that those who had been responsible for the financial and economic crisis in the first instance - the banks and the financial speculators – were being rewarded with bail-outs and tax cuts for the super- rich were continuing, even while the resulting budgetary deficits were cited as undesirable and as a reason for cutting back on welfare programmes. The OWS/Occupy movement has come up with a brilliantly catchy slogan that sharply highlights the increasing inequality and injustice under the neoliberal economy and the patently undemocratic nature of the system: ‘We are the 99 per cent’!
This helped focus attention on the blatantly unequal, unjust and plutocratic nature of the neoliberal capitalist economy and the unresponsiveness of the government to the demands of the overwhelming majority - the 99 % - of the population. The slogan has captured in an exceptionally sharp manner the fact that the system serves the interests of a tiny minority and not that of the ordinary working people or even the so-called middle class.
For more than two years now, the Greek working class, under the militant leadership of the Communist Party of Greece and other progressive political forces, has battled the attempts of the Greek government and international finance capital to impose huge burdens on the working people of Greece in the wake of an economic crisis for which the Greek workers were in no way responsible. As neoliberal governments have been slashing welfare provisions, privatizing pensions, reducing unemployment benefits and attacking hard won rights of working people, ever since the collapse of socialist regimes in Eastern Europe and the USSR, working class struggles have been on the rise in Europe. However, what is distinctive about the struggles since the economic crisis that began in 2008, and especially in recent months, has been the scope and width of these struggles and their spread to segments of the working population not involved in a big way in struggles earlier. Whether it was the struggle of French students who fought back, with the help of the entire working class movement, a legislation that would have made it easy for employers to dismiss them in their first employment or the struggles of workers in practically all the European countries on the pension issue or the recent sustained struggles of the Greek workers and mass mobilizations against the austerity programmes imposed by a pliant Greek government under the diktats of finance capital and the bigger European powers, Germany and France, or the historic strikes of public sector employees in Britain in 2011 and 2012, it is increasingly clear that we are entering a period of working class militancy in the developed capitalist world. Such struggles, in themselves, do not of course guarantee the strengthening of progressive forces, and can in fact be utilized by the right wing ‘parties of order’ against working people and to promote xenophobia and fascism. But, given that neoliberal policies are increasingly discredited, having had a free run for over two decades now, there is certainly a better prospect of a more progressive shift in the balance of political forces in these countries.
In a series of elections in France, Greece, urban Italy and a German province, the electorate has voted massively against the austerity policies of the ruling classes. While, in some instances, the right wing parties have been able to capitalize on the crisis, the trend has on the whole been to the Left.
These developments are most encouraging for the progressive forces in India opposing neoliberal policies. Just as the ruling class policies over the last two decades have made the Indian economy more vulnerable to global shocks, the global upsurge against neoliberal policies can strengthen the fight in India against these policies, rendering the ruling classes vulnerable in turn.
The Left-led Indian working class movement and the peasant movement as well as movements taking up the demands of women, dalits, tribals, students and youth, have all consistently fought LPG policies for over two decades. During some periods, such as when the first UPA government was dependent for its survival on the support of the Left parties, it was possible to stop moves towards further liberalization to some extent. It was also possible to secure some gains in the form of the NREGA and the Forest Rights Act. But things have grown much worse under the present UPA regime, which is pursuing neoliberal policies vigorously at a time when they are being discarded in many other parts of the world. The working class, which has led the struggle against neoliberal policies and in defence of the public sector, not only in the areas of industry and finance, but more generally, across all sectors including in education, health and so on, has an important role to play in the coming period in the struggle against neoliberal policies.
Most importantly, the future holds the possibility of developing international solidarity among working people and their movements in the global fight against neoliberal capitalism, in the wake of the militant upsurge of working people in Europe, North America and the rising tide of struggles here in India as well.
See his early, outstanding contribution: Subrahmanian, K K (1972): Import of Capital and Technology: A Study of Foreign Collaboration in Indian Industry (New Delhi: Peoples Publishing House).
SeeIMD Little & JA Mirlees (1974), Project Appraisal and Planning for Developing Countries(OECD)and Ian Little, TiborScitovsky and Maurice Scott,Industry and trade in some developing countries (Oxford University Press for the O.E.C.D. Development Center, 1970.) The implicit ‘free market’ approach was also to be found in work on the Indian Economy by JagdishBhagawati,T.N.Srinivasan, Vijay Joshi and others.
Recall Pershing and Cruise missiles and the star wars called by the misleading name of ‘strategic defense initiative’.
It must be clarified that the collapse of the socialist regimes of Eastern Europe and the USSR was due to many complex factors, and the internal ones were of course most important. The point being made here is that the rise of finance capital and of the neoliberal regimes of Reagan and Thatcher also had a role to play in the collapse.
For a clear exposition of the implication of changes in the international economy with the rise to dominance of finance capital for the development strategy adopted by the ruling classes in India, see C.P.Chandrasekhar and JayatiGhosh (2004), The Market that failed, LeftWord Publications, New Delhi
It is interesting to note that the programme of the Communist Party of India (Marxist), as originally adopted in 1964 and as updated in 2000, characterizes the State in India as the state of the bourgeoisie and the landlords, led by the big bourgeoisie, increasingly collaborating with foreign finance capital. In my view, this has turned out to be a remarkably prescient assessment.
 GDP growth rates have fluctuated to some extent between 1991 and 2012, as shown below:
Period GDP Growth Rate,%(approx.)
1991-1997 6 %
1998-2003 4.5 %
2003-2008 8.5 %
2008-2012 6.5 %
The attribution by leading government officials, including ‘reputed’ economists, of unprecedentedly high rates of food inflation to ‘rising rural incomes’ and supply-demand imbalances is not only an instance of blaming the victims, but completely off the mark as well.
That the minority Congress government of 1991 later secured a majority in parliament through measures widely regarded as dubious is another story.
For a lucid exposition of the Eurozone crisis, see the excellent article by C.P.Chandrasekhar entitled ‘End of Europe’ on the website http://www.networkideas.org/news/nov2011/news30_Europe.htm