No. 50, August 2011

No. 50
(August 2011):



To our readers

Aspects is being published after a gap. This is our fiftieth issue. We thank our readers for their continued support throughout these years. We continue to solicit your responses, including your criticisms.

The economic crisis in the ‘developed world’ has intensified, as manifested by the debt crisis of countries in Europe, the downturn in the US economy, and now the turmoil in world financial markets following the downgrading of the US’s credit rating by Standard & Poors. As is well-known, S & P is one of the three US-based credit rating agencies which had earned global ridicule by assessing as ultra-safe various debt instruments that turned out to be junk, triggering the crash of 2008. The remarkable spectacle of the world’s most powerful Government pleading its case before such an agency, only to be nevertheless downgraded on the ground that it (the US) had not agreed to slash its future expenditures by $4 trillion, speaks volumes about the stranglehold of financial capital on the world economy today. S & P has threatened further downgrades if the US government does not follow its recommendations.

After the collapse of the US investment bank Lehman Brothers in October 2008, the US central bank, the Federal Reserve, provided the largest financial institutions in the US and elsewhere $16 trillion in financial assistance (see – a sum larger than the US GDP. As a result, the financial sector roared back to profit. Pre-tax corporate profits in the US economy hit a record high; all the gain was in the financial sector, which raked in profits at an annualised rate of $426.5 billion in the fourth quarter of 2010. Fattened on Government funds, the financial sector now demands a cut in Government spending on ordinary people – the real producers, who make tangible things and deliver useful services for a living. With consumption expenditure thus slashed, the persistence of the current depression is guaranteed. US corporations meanwhile are sitting on $1.9 trillion in cash, and are busy in financial operations such as share buy-backs, mergers and acquisitions, but are refusing to make investments in productive activity, because they do not see adequate demand. US unemployment, properly measured, is rising (i.e., the worker-population ratio is declining). Similarly, ‘austerity’ programmes are being imposed by the stronger economies in Europe on the weaker ones, guaranteeing a similar fate in the Euro zone as well. All of this tells us that world capitalism has entered an even more parasitic phase.

The notion that the present Indian economy can continue growing merrily despite the crisis in the developed world – what is called ‘decoupling’ – was dealt a severe blow in the period after October 2008. As the Reserve Bank of India’s Report on Currency and Finance 2008-09: Global Financial Crisis and the Indian Economy argues, the increased integration of the Indian economy with the global economy – i.e., ‘globalisation’ – has meant, not surprisingly, that global shocks are transmitted faster and more completely to India. The share markets, bank credit, exports, consumption, investment, and industrial growth all felt the impact of events half-way around the world. Among the different channels through which the shocks were transmitted here – such as trade, finance, commodity prices and expectations – the RBI finds that the financial channel was dominant. Net foreign capital inflows fell by 92 per cent, from $108 billion in 2007-08 to $8.7 billion in 2008-09. The slowdown in the Indian economy from the third quarter of 2008-09, said the RBI, “invalidat[ed] the decoupling hypothesis.”

Despite this, the decoupling theory is being revived, with the finance minister and others assuring the nation that India’s “growth story is intact.” However, much of this “growth story” was based on two developments. First, the rapid growth of the exports of software and other services to the developed world, which will be affected by the slowdown in those markets. Secondly, credit-fueled consumerism, exemplified by the housing and automobile sectors; that in turn depended on the easy liquidity and low interest rates made possible by large capital inflows. It is likely that, in the current turmoil and decline in the world economy, capital flows to India would get affected, despite the frantic efforts of the Government to obtain foreign investment at any cost, in any sector. Add to this the fact that the Government is now on the path of slashing its fiscal deficits, which it brings about not by increasing taxes on the rich but by slashing its own expenditure. As private consumption, Government consumption, and exports all slow down, and as private capital invests only when it anticipates enough demand for it to make a profit, investment would slow even more sharply; indeed, there are already signs of it doing so.

At any rate, as we have argued in this issue, there is little to be mourned in the slowing of the ‘growth’ that has been taking place. However, in the downturn, such cancerous growth will not be replaced by a healthy growth – one that meets people’s needs, creates employment, and protects the environment. Rather, it will be marked by the rulers’ efforts to revive the earlier growth by the most regressive and predatory means. They are pressed on in this effort by the global predators, who seek gains here more urgently as they face their own domestic crisis. At the same time, the crisis impels the people, who are at the receiving end of this onslaught, to look more urgently for alternatives to such a dysfunctional social order.

—The Editor



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