Nos. 44-46, April 2008
Nos. 44 - 46
India’s Runaway ‘Growth’: Distortion, Disarticulation, and Exclusion
Essentially, the current phase of dramatic GDP growth has not been fueled by internal forces, but by the external environment. (All the regions of developing countries, including sub-Saharan Africa, saw an upturn in growth starting around 2003. Thus India’s surge, while sharper than most other developing countries’, is part of a broader phenomenon.) This expansion is not fundamentally transforming the Indian economy and society; rather, it has greatly accentuated its distortions. Moreover, given that the world economy is in a volatile state, and on the brink of a major crisis, the external stimulus to India’s growth may turn into a destabilising factor.
Let us look at how this environment has been created. Over the years, the activities and behaviour of international monopoly capital have changed in significant ways. One thing is not new: Capital, as always, is driven by the need to accumulate more capital. Much as sharks must keep moving or sink, capitalists must keep accumulating or go under. However, since the rise of monopoly capital, the world’s chieftains of capital have been faced with a strange problem. They enjoy vast surpluses; but, as a long-term trend, they find less avenues to invest these surpluses profitably. If they put up more productive capacity, they would need to reduce prices in order for all that production to be absorbed; that would mean lower profit margins – which goes against the nature of monopoly capital. On the other hand, if they do not invest these surpluses, they cannot accumulate further. This peculiar disease of plenty gives rise to a long-term tendency toward stagnation.
Within this long-term tendency there are bouts of hectic investment, such as the boom of dotcom-telecom investment of the late 1990s, but when these bouts of excess halt they leave business even more wary of investment. Rather than quote left-wing economists, we will rely in the following account largely on the Economist, perhaps the leading voice of international capital. It reported in 2005: “For the past three years, while profits have surged around the globe, capital spending has remained relatively weak. As a result, companies in aggregate have become net savers on a huge scale. Their thrift may explain why bond yields are so low [i.e., interest rates are low because firms are flush with funds]. Since 2000, the corporate sector in the developed countries have switched, as a group, from being big borrowers to being net savers: i.e., their profits exceed their capital spending. The total increase in companies’ net saving in the past four years has been more than $1 trillion, three per cent of annual global GDP and five times the increase in net saving by emerging economies over the same time period.... If company bosses recognise that the current consumer boom is built on shaky foundations – in particular, rising house prices – they are likely to be reluctant to invest.”1 In the U.S., business expenditure stopped falling in 2004 and began rising again, but it remained weak compared to earlier recoveries. This reluctance to invest has inevitable consequences: “America’s long-term potential rate of growth is falling, to perhaps its lowest pace in over a century”.2
And yet corporations must invest their savings somewhere. As a result international capital is on a constant hunt for new investment opportunities. In the course of this hunt international capital has been driven to rely increasingly on the growth of the financial-speculative activities, which have far outstripped the growth of the commodity-producing sector.3 The world’s financial markets of all types (stocks, debt, foreign exchange, commodities, and complex financial instruments called ‘derivatives’) have witnessed an extraordinary explosion of gambling. To take just one example, the actual ‘use’ of foreign currency is the import of goods or services; in the entire year 2006, world trade in goods and services was $14.5 trillion. But the buying and selling of foreign currency by international speculators in the same year averaged $2.7 trillion a day. In other words, trading in foreign currency was 68 times what would be required for international trade in goods and services. Similar explosions have taken place in all other financial sector activity, with new instruments being added at a hectic pace.
In order for this financial activity to keep growing, it needs to create ever-increasing scope for itself. One way of doing so is by opening up economies hitherto closed or restricted for foreign speculative capital, and by removing restrictions on entering various sectors within those economies. The financial sector worldwide sits like a giant parasitic creature atop the commodity-producing sector, demanding complete freedom to enter all arenas and bleed that sector.
Staving off worldwide slowdown
How does the U.S. finance its giant trade deficit? In any other country, such a huge and ballooning deficit would have led to an immediate crisis. But the U.S. has so far been able to finance its deficit with capital inflows from the rest of the world, including from underdeveloped countries, and thus postpone the crisis. Why do these countries invest their capital in the U.S.? Because if they did not do so the dollar would fall against their currencies, their goods would become more expensive in dollar terms (i.e. to U.S. consumers), and their exports would fall, harming their own ‘growth’. Also because, as their own economies have been opened up to huge inflows of volatile foreign capital, they need to build up foreign exchange reserves to provide for the occasion when there may be a sudden outflow (as happened in Southeast Asia in 1997). Since the dollar is still the main currency used for international payments, countries keep a large proportion of foreign exchange reserves in dollars, in the form of U.S. government debt (known as U.S. Treasury securities).
Such is the bewildering merry-go-round of flows to which the world economy is bound. A portion of the giant sea of cash generated by the U.S. in the course of this operation comes back to the rest of the world in the form of speculative capital seeking attractive investment opportunities. This in turn sends third world share markets soaring. While third world rulers are happy with high share prices, this inflow of foreign cash in turn tends to either bloat the money supply in those economies, leading to inflation and instability, or push up the value of their currencies, threatening their exports. To ward off the latter, the central banks of these countries buy up the incoming dollars and invest them – largely in U.S. government debt, funding another round of U.S. consumption. The current perverse trend of net financial transfers from the developing economies to the developed countries, which began in 1997 at $1.3 billion, reached $760 billion in 2007.4 We turn once again to the Economist for a description:
The Economist correctly locates the main reason for the tendency of the international financial sector to make riskier investment decisions, namely, the abundance of liquidity and the drive therefore to seek higher returns. It is this drive that explains the current ‘sub-prime crisis’, whereby, directly or indirectly, most of the international financial sector has invested in high-interest loans made by banks in the U.S. and U.K. to poor people (i.e., people who are ‘bad risks’) to buy houses.
Flood of inflows beyond the control of Indian authorities
As dollars become more plentiful than before, the value of the rupee tends to rise. This can have several harmful effects. First, foreign goods become cheaper in rupee terms, and so domestic producers find it harder to compete with imports. Secondly, Indian exports become more expensive in dollar terms, and find it harder to compete on world markets. Both these trends depress domestic economic activity. Thirdly, if the rupee is set on a rising course, it becomes even more attractive for foreign speculators to bring dollars into India; because even if they were to make no profit on their investments in India they would be able to take out more dollars than they brought in. (For example, let us say a foreign speculator brought in $1,000 at the end of December 2006. He would have exchanged it for Rs 44,110. Even if he did not earn a paisa of interest on this sum for a year, he could have bought $1,119 with it at the end of December 2007.) This brings in yet more speculative capital, and worsens the problem.
In order to prevent this from happening, the country’s central bank, the RBI, buys up foreign exchange as it flows into the country, and this purchase becomes part of the country’s foreign exchange reserves, which are invested abroad in various types of interest-earning bonds such as U.S. government debt. The scale of this phenomenon can be seen in the size of the RBI’s foreign exchange assets at end-March of each year: 2003, $71.9 billion; 2004, $107.4 billion; 2005, $135.6 billion; 2006, $145.1 billion; 2007, $191.9 billion – an addition of $120 billion in four years. Between end-March 2007 and end-December 2007, the rate of inflow broke all records, as another $66 billion poured into the reserves in just 9 months.
The flood of foreign capital increases the instability of the entire economy by fueling speculative booms in the share market, commodities market, real estate, and so on. The easy liquidity in the economy as a whole, and high returns in speculative sectors, lead domestic investors to join in the casino. The Bombay Stock Exchange Sensex (index of the top 30 stocks) rose from 5591 at March-end 2004 to 12455 on April 2, 200; as if this were not steep enough, it rose at its fastest pace thereafter to close above 20,000 for the first time on December 11, 2007. The Reliance Power issue of shares in January 2008 was the largest-ever initial public offering (IPO) in India. Yet it was fully subscribed within one minute of its opening, and was subscribed 72 times by the time of its closing; the portion reserved for ‘high net worth investors’ was subscribed 208 times. The issue received Rs 7.52 trillion of bids – astounding, considering that Reliance Power is a completely new company with no assets, and without record of having executed a single project. Turnover in the commodity futures markets rose by 1570 per cent between 2003-04 and 2005-06, rising from 4.7 per cent of GDP to 76.8 per cent; it soared further in 2006-07.
As the speculative boom proceeds, foreign investors may decide at some point that assets are now overpriced (for example, prices may be out of alignment with those of their similar investments elsewhere in the world). They would pull out till prices collapse to an attractive level. India’s share market has seen several steep falls in the last month. The Economist warned in July 2007 that India’s real estate was set for a fall:
In November 2007 the Economist ranked India as one of the riskiest ‘emerging economies’ in the world, saying “Those with current account deficits [like India] are vulnerable to a sudden outflow of capital if global investors become more risk averse.”9 In the calendar year 2007 the Indian rupee was among the three ‘emerging market currencies’ that appreciated the most, after the Brazilian real and the Thai baht. But India is very unusual in that the rupee has appreciated despite its current account being in deficit,10 i.e., despite it having to cover its current foreign exchange requirements with capital inflows. So the entire appreciation in the rupee was not the result of surpluses on trade in goods and services; rather, it was despite deficits and because of capital inflows.
Shifts in the global economy and their impact here
Again as part of this drive to increase the share of profit worldwide, and making use of technological developments in production, transport and communications, transnational firms have increased their imports of goods from sites in low-wage countries. (Even so, the maximum ‘value-addition’, such as the retailing margin, accrues to firms in their own countries.) This shift has allowed goods made in India, whether by Indian or foreign firms, to enter world markets in certain sectors hitherto closed to them, such as the automobile parts sector. Moreover, several large Indian firms have improved their production standards and are emerging as competitive exporters.However, this process cannot continue expanding till the point where the export sector would absorb a major share of the labour force, and thus eliminate, or even substantially narrow, the wage differential between the developed countries and India. First, demand in the developed world is limited, whereas the unemployed/under-employed labour force in India is vast; second, the technology used in such export industries is not labour-intensive; and third, a large number of third world countries with large reserves of unemployed/under-employed are similarly attempting to export to the limited developed world market. Continuing success in exports requires that wages be held down, and the Indian State has been ensuring this by changing the environment for labour – i.e., simply refusing to implement workers’ legal rights, using State machinery against struggling workers, creating an openly anti-worker climate among the judiciary, and so on. (Moreover, volatile capital flows either way tend to build downward pressure on wages: With large capital inflows the rupee appreciates, making India’s exports less competitive; in response exporters try to reduce costs by reducing wages. With large capital outflows the rupee depreciates, prices of imported commodities such as oil rise, and inflation eats into workers’ real wages.)13 Thus, even as the share of wages in value-added in the developed world declines, its share in countries like India does not rise; rather it too falls.
It is important to note here that foreign trade has not boosted demand in the Indian economy: Net exports (exports minus imports) is a negative figure. In other words, the market India loses because of imports is larger than what it gains by way of exports. The Economic Survey 2007-08 notes: “The contribution of net exports of goods and services to overall demand also declined between the two plans to a negative 5 per cent. Thus the external trade has had a dampening effect on aggregate demand during the just completed Plan (2002-07).” The contribution remains negative in 2007-08.
It is worth pausing and noting a significant point here. Two of the most important claims made regarding the benefits of ‘globalisation’ are that foreign capital boosts investment and foreign trade opens expands markets and thus boosts demand. We have seen that in fact (i) foreign capital has not gone into investment, and (ii) under ‘globalisation’ India’s foreign trade has actually wound up depleting its markets and depressing demand.
However, it is not as if the inflows of foreign capital have had no effect at all. They have helped foreign capital capture more and more of the Indian economy, as we shall see below.
Indian multinationals: the global context
However, this is misleading. For this development has been accompanied by another development, namely, the increasing shift of the developed economies to the financial sector. Around a third of the profits growth in the U.S. economy in the last decade has come from the financial sector, which along with the fall in labour’s share, does much to explain the high profit rates in the economy as a whole. The leading financial firm Goldman Sachs remarks that “margins in many non-financial industries remain at historically unremarkable levels.”15 The increasing financialisation of the world economy implies a shift in the centre of gravity away from the production of goods or non-financial services, a shift to financial sector activities. Where non-financial transnational corporations once played the dominant role in shaping the world economy, a greater role is played today by the financial and speculative firms; although giant firms often combine both functions, where the interests of the two conflict the financial sector prevails. (This is not to write a premature obituary of the non-financial transnational corporation, but merely to take note of a partial change.)
Increasingly it matters little to international financial capital whether a car is produced by a European firm or a Korean or an Indian one, as long as financial capital is able to invest in whichever would be more profitable and to reap the profits of such investment. Indeed if a European firm is likely to do better after being taken over by the Indian firm, international financial capital would support and finance the takeover (this may not hold for firms in strategic sectors such as oil, infrastructure, arms, etc).It is important to keep in mind that FIIs now own very large stakes in the major Indian firms. At the end of December 2007, FIIs held around 37 per cent of the ‘free-float’ shares (i.e., shares held by those other than the promoters) in the top 1,000 firms of the Bombay Stock Exchange (BSE).16 In 147 firms listed on the BSE FII holdings are 20 per cent or more. In 24 of the top 200 firms in the BSE, the FIIs’ combined shareholding is higher than that of the promoters (the controlling shareholders). Whereas net inflows of FII investments between 1992 and December-end 2007 stood at $70.78 billion,17 the market value of FII holdings in listed companies on the Bombay Stock Exchange stood at well over $251.5 billion on that date; the returns are staggering. In other words, international financial capital has greatly increased its hold on the Indian corporate sector.18 This financial presence now represents the most prominent form of imperialist capital in the Indian economy. This phenomenon is not restricted to India. For example, after the Asian crisis of 1997-98, Korea was invaded by foreign capital, including FIIs. By May 2004 foreign investors owned nearly half the shares in South Korea’s top 10 publicly traded conglomerates; of these foreign holdings, FIIs accounted for about two-thirds. Foreigners owned 55 per cent of Samsung, and 47 per cent of Hyundai.19 Take the South Korean steel giant Posco, which is in the process of making the single largest foreign direct investment in India ($12 billion). The Bank of New York, a U.S.-based investment firm, is reportedly Posco’s largest shareholder, holding 22 per cent of its shares, and another such U.S.-based firm, Capital Research and Management, holds another 4.4 per cent.20 Another 4 per cent is reportedly owned by the famous U.S. investment firm Berkshire Hathaway.
Thus, even as new multinational corporations have emerged from the ‘emerging’ countries, encroaching on the markets of multinationals of the imperialist countries, financial capital of the imperialist countries has invaded the new emerging multinationals.Moreover, given the “deluge of spare cash” internationally and the Indian corporate sector’s high profitability in recent times, Indian firms have been able to borrow large sums abroad at interest rates lower than those prevailing in India. There has been a surge in external commercial borrowing by Indian firms, rising from $2.5 billion in 2005-06 to $16.2 billion in 2006-07 and to $10.6 billion in just the first six months of 2007-08. For acquiring firms abroad, too, Indian firms generally have drawn on large foreign borrowings; it appears that not all of these may appear in India’s balance of payments. Thus total foreign borrowings by Indian firms in calendar year 2007 were estimated at $42.1 billion, up from $28.8 billion in calendar year 2006. The surge in borrowing took place throughout Asia; “acquisition financing... comprised the biggest chunk in overall activity in 2007.”21
The strange phenomenon of Indian firms’ investment abroad should be seen against this larger background of the financialisation of capital worldwide. Rather than marking a basic change from the earlier subordination of the Indian economy by imperialist capital, it remains within the frame of a new, more complex, form of the same.The phenomenon of Indian firms’ investment abroad is also a striking expression of the distorted pattern of the Indian economy. Outflow of foreign exchange on account of Indian direct investment abroad (IDIA) rose from $4.5 billion in 2005-06 to $11 billion in 2006-07,22 and is expected to rise steeply in 2007-08. Whereas the bulk of the economy (in the sense of the sectors in which the bulk of the workforce is employed) is crying out for investment, the private corporate sector, with active encouragement from the State, has been busy exporting capital.
As Indian firms are allowed to stage takeovers (even hostile ones) of foreign firms, it will be politically impossible for the Indian State to block foreign takeovers of major Indian firms. The rapidly rising FII stakes in Indian firms may facilitate such takeovers. (Indeed, in certain cases large over-capacity is developing worldwide. In such a situation, ‘consolidation’ usually starts – i.e., giant firms start taking over other firms. Indian firms expect to become targets of large foreign firms on the prowl for takeovers. One strategy for Indian firms to avoid this fate is to become large and/or debt-laden, using the greater access to international capital markets. Thus, with the help of giant foreign borrowings, Tata Steel has taken over an Anglo-Dutch firm much larger, and possessing more sophisticated technology, than it. Whether or not the acquisition turns out to be profitable, the large debt will have to be serviced; and this fact may make Tata Steel, and the precious natural resources it controls, vulnerable to foreign takeover in the future.)
Political power of international financial capital
Whatever its qualms, the RBI has had to implement increasing capital account convertibility – in which the freeing of investment by Indian firms abroad is a very important step. The further the economy moves toward full capital account convertibility, the greater will be its vulnerability to speculative inflows and outflows.
In anticipation of this, the greater will be the rulers’ need to subordinate domestic economic activity to financial interests: Witness the inability of the RBI to check inflows even of the most suspect variety, despite the consequent rupee appreciation throwing millions of Indian workers out of work (the minister of state for commerce has put export sector job losses at two million), and despite the State having to incur huge subsidies on ‘sterilising’ foreign inflows (i.e., absorbing them to prevent them from increasing the domestic money supply). The Indian State has in fact given primacy to maintaining a favourable environment for FIIs. On the one hand, given the limited supply of free-float shares (i.e., shares held by those other than the promoters), large foreign inflows have made share prices soar; and so FIIs have put pressure on the Indian rulers to make available for purchase a steady flow of fresh shares through disinvestment. At the same time, the Indian rulers have also been finding ways to channel more domestic finance to the share market in order to allow foreign speculative capital a cushion to sell without making a loss. All such measures are being termed giving the market ‘depth’.
High cost of outflows
After the 1973 rise in oil prices, the oil-producing countries of the third world, lacking broad-based economies and financial infrastructure of their own, deposited their new influx of dollars in the banks of Europe and the U.S.. These banks, now flush with funds, needed to find large borrowers. With the help of the third world ruling elites, they managed to get various third world countries, particularly in Latin America, to borrow large sums, at initial low rates of interest (with provisions for later hikes). They created the impression that these countries could go on borrowing forever, paying off loans with fresh loans. The foreign loans did not really serve development in these countries. But they financed large projects which created business for multinational corporations, and the elites of these countries skimmed off a good portion of these loans, depositing them back (illegally) in the same western banks. By 1982, the underdeveloped countries had piled up a mammoth debt of $827 billion.
At this point, the U.S., facing high inflation due to a fresh round of oil price hikes, hiked interest rates steeply. The hiked interest rates on U.S. government bonds attracted some capital away from third world countries. Now debtors such as Mexico found themselves unable to meet their foreign debt payments; whereupon all foreign banks stopped extending fresh loans to Latin American and African debtors. Thus began the great third world debt crisis of the 1980s. The International Monetary Fund agreed to provide foreign exchange loans to the debtors (in the bargain, of course, saving the developed-world banks that had lent to these countries), on the condition that they accept what it called ‘structural adjustment’ packages – slashed Government expenditure, massive privatisation, opening of the economy even further to imports, dismantling of efforts to get better terms for agricultural and mineral exports, opening of various sectors to foreign investment and takeover, and so on. These amounted to a great bonanza for the imperialist countries’ corporations. Latin America’s per capita GDP sank in the 1980s, and poverty grew steeply in what became known as its ‘lost decade’.
Mexico studiously implemented this programme. The Economist noted in March 1995: “Only a few months ago, Mexico was one of the third world’s stars”: zero fiscal deficit, removal of import barriers, massive privatisation and foreign investment, capital account convertibility to assure foreign capital complete ease of entry and exit. All this was accomplished in the face of mass distress; popular resentment found militant expression in the uprising in Chiapas in January 1994. To a chorus of praise from the IMF, World Bank, and so on, the Mexican government also piled up high-interest short-term debt subscribed to by U.S. investors. Mexico’s exemplary adherence to IMF policies did not save it, however, when the U.S. hiked interest rates from 3 per cent to 6 per cent over the course of 1994. Capital took the next plane out of Mexico in December 1994, sending the value of the Mexican currency plunging, and prices soaring. Mexico was thus thrust into crisis again, and into yet another ‘austerity’ programme – with further gains for foreign capital.
The 1997 crisis in East and Southeast Asia offers fresh evidence of the devastation caused by such capital outflows, the ground for which was laid in these countries’ opening up to capital inflows in the earlier period. The countries affected by the 1997 crisis had to suffer soaring inflation as their currency values plummeted. The IMF provided foreign currency loans on severe conditions, which resulted in the stalling of domestic economic activity, takeovers of domestic firms by foreign investors at bargain prices, and an increase in poverty. Thus the harm done by large, sudden capital outflows is not limited to the losses to speculators on the stock exchange; rather it brutally affects the vast masses. As Brecht observed,
Impending slump in the world economy and India
1. “The corporate savings glut”, Economist, 9/7/05. (back)
2. “Slow road ahead”, Economist, 28/10/06. (back)
3. Harry Magdoff and Paul Sweezy were perhaps the first to analyse this phenomenon, in their journal Monthly Review. (back)
4. United Nations, World Economic Situation and Prospects 2008. (back)
5. “The global gusher”, January 6, 2007. In this paragraph, the Economist contradicts its earlier piece (9/7/05), in which it ascribed low U.S. interest rates in the main to the reluctance of corporations to invest. (back)
6. Economic Survey 2007-08. This is the average gap between domestic savings and domestic investment, which is filled by foreign savings, i.e., net capital inflows. The average figure is zero because in the first two years of the Plan there was actually an export of capital from India. The average for the Ninth Plan (1997-2002) too was quite low: of an investment rate of 24.3 per cent of GDP, foreign inflows accounted for only 0.7 percentage points. (back)
7. Economic Advisory Council, Review of the Economy, 2007-08, January 2008. (back)
8. “Home truths”, 7/7/07. (back)
9. “Dizzy in boomtown”, 17/11/07. (back)
10. Economic Advisory Council, op. cit. (back)
11. Ellis, Luci and Kathryn Smith, “The global upward trend in the profit share”, BIS Working Papers no. 231, 2007. (back)
12. “Rich man, poor man”, Economist, 20/1/07. (back)
13. Generally workers’ wages catch up with price rise at best with a delay; and given that a large percentage of workers in export sectors are in the unorganised sector (textiles, garments, leather goods, marine products, etc), they would be unlikely to get fully compensated for price rise. (back)
14. “Marauding maharajahs”. (back)
15. “Profit mirages”, Economist, October 14, 2007. (back)
16. By market capitalisation, that is, the market price of the shares multiplied by the number of shares. We have converted at the rate of Rs 39.4/US $. The share holding data is from the Prowess database, CMIE. (back)
17. Net inflows of FII capital from Economic Survey 2002-03 and RBI Bulletin, February 2008. (back)
18. Another form of such capital, what is called “private equity”, is officially classified as foreign direct investment, but actually is speculative and volatile like FII investment. According to the firm DataSource, total private equity deals in India announced in 2007 amounted to $19 billion. (Economic Times, 18/2/08). (back)
19. “A quiet foreign invasion of Korea’s giants”, New York Times, 20/5/04. (back)
21. “India overseas loans hit record $42 billion”, Business Standard, 4/1/08. Thomson Financial is cited as the source for the data. (back)
22. RBI, Annual Report 2006-07. (back)
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