Already before the passage of the bill there were many prominent political figures, including some belonging to the opposition BJP, who were warning that “this was not the right time for such legislation”. The votaries of neo-liberalism, including Prime Minister Manmohan Singh, are known to be opposed to this measure. The reason for all this opposition is simple: such a legislation runs counter to the predilections of international finance capital; and in an economy which is desperately trying to attract finance from abroad for covering a huge current account deficit and shoring up a tumbling rupee, alienating international finance capital is unwise.
The reason why such a bill will scare finance capital away is again quite obvious. The provision of food security as envisaged in the bill is estimated to cost Rs1,30,000 crores per annum. If this amount is raised through increased taxation, then some of it is bound to fall on the well-heeled; and capital invariably resents this. On the other hand, if it is to be covered by government borrowing, then the fiscal deficit goes up, which again is disliked by finance capital. And quite apart from the issue of how the requisite finance is raised, any government activism on behalf of the poor is always resented by finance capital. So a food security legislation is the last thing it would like to see, especially in an economy with a huge current account deficit, where the expectation of a further fall in the currency is already scaring it away (and thereby ensuring that this expectation itself gets realised).
From the conventional neo-liberal point of view therefore the objection to food security legislation is understandable. This objection however is wrong because the conventional neo-liberal point of view itself is wrong. The belief that by assuring finance capital that there will be no control over its freedom to flow in or out of the country, the government can soothe it to a point where the “markets become calm” and the fall in the rupee stops, is an entirely mistaken belief. The government itself is on record saying that net capital inflows into India can finance a current account deficit of no more than 2.5 percent of the GDP. The current account deficit last year was 4.8 percent of GDP. There is thus a huge gap, which will make the rupee keep sliding down, and compound this slide further by setting off capital outflows.
STRUCTURAL PROBLEM
India’s problem in short is not one of an erratic capital outflow caused by some sudden loss of nerve on the part of international “investors”. It is a structural problem, of having a current account deficit that is simply too large to be financed by even the most optimistic projections of “normal” net capital inflows. Everybody, including the financiers, knows that this situation is unsustainable, which is why the finance minister’s repeated assurances that no capital controls are being contemplated by the government have failed to stem the slide of the rupee. The situation in short is such that something has to give; some measures have to be undertaken against the huge current account deficit.
What the government has done so far by way of directly controlling imports is too paltry. Either the direct control measures have to be widened, in which case there will be a departure from the neo-liberal shibboleth of “trade liberalisation”, which will then have to be accompanied by capital controls to restrict financial outflows by “investors” worried about the retreat from neo-liberalism. Or, within the parameters of a neo-liberal regime, the government will approach the IMF which will then organise a “package”, as has been the case with European countries like Greece (and as was the case with India at the start of neo-liberalism in 1991).
In this “package”, in return for financial inflows for overcoming the current account deficit and preventing the slide of the rupee, a whole lot of measures of “austerity” and “privatisation” will have to be undertaken by the economy. The IMF these days even “permits” some capital controls as part of the package (getting kudos from some “progressive” quarters for its “realism” and “flexibility”), provided they come wrapped together with its usual measures of “austerity” and “privatisation”.
All these measures of “austerity” and “privatisation” are invariably against the people, ie, against the workers, the peasants, the agricultural labourers, the white-collar workers, the government employees, and so on. They entail cuts in public welfare expenditure which hurts the poor; they entail privatisation of government enterprises, which, apart from its adverse consequences for national self-reliance, causes mass retrenchment; they entail privatisation of public sector banks, which means that even the limited amount of institutional credit going to the peasants and petty producers dries up; they entail salary cuts and retrenchment of government employees; and they entail restrictions on the overall level of aggregate demand which mean that the reserve army of labour swells still further, putting even greater downward pressure on the wages of organised workers.
Indeed the raison d’etre of these IMF-imposed measures is that they seek to reduce the current account deficit, not by trade restrictions that go against the principle of “free markets”, but by reducing aggregate demand in the economy (ie, by creating unemployment and squeezing the living standards of the working population). Such reduction in aggregate demand, it is held, reduces the demand for imports and hence rectifies the current account deficit.
As a matter of fact, however, it does not, since the kind of people whose demand is cut, namely the ordinary working people, do not have a particularly import-intensive demand pattern. But that becomes a matter for the future; the very adoption of a “package” involving cuts in their demand via the imposition of “austerity” brings in finance in the short-run to keep the balance of payments afloat.
DOUBLY WRONG
Those arguing from a conventional neo-liberal point of view, and this includes those who were opposing the food security legislation on the grounds that “this was not the time for it”, basically must have such a denouement in sight if they are clear-sighted enough. And this conventional neo-liberal point of view is wrong in a double sense: it does not work, and it is palpably against the people.
The fact that it does not work arises for two reasons: first, as already suggested, squeezing the people hardly saves much on the import bill. On the other hand the political protests it causes, if not immediately then at least over the medium term, tend to frighten finance capital into flowing out of the country, which means that no balance of payments “equilibrium” is ever achieved despite the squeeze on the people. Secondly, this perpetual “disequilibrium”, with periodic re-negotiations between the country and international finance capital under the aegis of the IMF, leading to renewed “packages” of ever increasing austerity, and ever greater burdens on the people, increases the scope for capital outflows, since each such renegotiation brings even more of the country’s assets under the control of international finance capital, making them even more susceptible to flight.
It is also wrong in the ethical sense, of being anti-people. Curtailing luxury imports hurts the rich, while curtailing the level of aggregate demand, and that too via cuts in government welfare expenditure, hurts the poor and the working people. In fact one can assert that a policy of trade and capital controls, which entails a departure from neo-liberalism, is “right” in both these senses. It is obviously “right” in the ethical sense, since a State responsive to popular pressure will target only such selected import items for restriction which do not impinge on the people’s living standards, and hence will curtail the current deficit without much adverse effects on the poor and working people. At the same time it will be more efficacious in curtailing the current account deficit, for the following reason.
Imports in any economy can be seen as the product of its income (GDP) and the import-income ratio (what some economists call “the propensity to import”). The neo-liberal strategy seeks to reduce imports by reducing income (via curtailing aggregate demand through “austerity”). This generates unemployment and recession in the economy; but since austerity is exercised at the expense of the poor and working people, income distribution simultaneously shifts in favour of the rich whose “propensity to import” is higher than that of the poor. So, even though there is recession, unemployment and income loss for the economy as a whole, imports do not fall much, because the rise in “import propensity” owing to the greater inequality in income distribution offsets whatever impact the income curtailment via “austerity” might have had. This is what underlies the “perpetual disequilibrium” mentioned earlier.
Trade and capital controls on the other hand target “import propensity” directly; hence, even with minimal reduction in income there is a curtailment of imports, and this happens, as already suggested, without necessarily impinging on the poor. It is for this reason that a regime of controls is “right” in the dual sense, and a neo-liberal regime “wrong”, in the face of a balance of payments crisis of the sort that the Indian economy is experiencing at present.
There are therefore two alternatives before the economy today: either it persists with the neo-liberal trajectory and imposes an increasing burden on the people with little effect on the basic balance of payments problem, in the name of overcoming which this burden is sought to be imposed in the first place; or it moves towards trade and capital controls and jettisons the neo-liberal trajectory, which is both more efficacious and more equitable. This choice between the two alternatives may not appear in a stark form immediately, because India still has foreign exchange reserves that can cover 6-8 months’ imports, unlike in 1991. But this choice is inevitably coming up.
Those who advocate the food security measure therefore will necessarily have to choose the path of trade and capital controls and move away from the neo-liberal trajectory, if they are serious about their professed aim of reducing the extent of hunger and malnutrition in the country.
*
Prabhat Patnaik People's Democracy 01 September 2013
Posts
No comments:
Post a Comment