No. 47, March 2009

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 centrality.

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 shifting.

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 evaporated.

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 future.


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. (back)

6. “Endless bubbles”, 20/6/03. (back)

7. Joseph Stiglitz, “Will the dam break in 2007?”, Project Syndicate, 2006. (back)

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. (back)

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. (back)



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