No. 54, June 2013

No. 54
(June 2013):

Balance of Payments: The Political-Economic Background

The authorities talk of the impending crisis in India’s balance of payments as if it had no history. They trace it to various immediate causes: the alleged ‘excess’ domestic demand generated by fiscal deficits, high international oil prices, low domestic oil prices, the mysterious Indian fascination with gold, high domestic inflation which drives Indian savers to buy gold, the slump in demand for India’s exports due to the sluggish state of the world economy, and so on. In other words, the balance of payments crisis is presented as a malady which is either amenable to a ready cure within the existing policy framework (such as slashing Government spending and hiking domestic petroleum product prices), or is self-limiting, and merely awaits a revival of the world economy (or even limited windfalls such as a fall in international oil and gold prices).

Leaving aside the untenability of such explanations and remedies, what we need to note is that balance of payments problems are not something new to India: they have been endemic to its post-1947 history. And they have deep roots in the political economy of India. As with any phenomenon, it helps to look into the history of India’s balance of payments to understand its present.

India’s balance of payments crisis can be viewed as the expression of a contradiction. The rulers, and the classes they represent, have always aspired to rapid ‘growth’ without confronting the institutional barriers to real development, i.e., the barriers inherent in the prevailing social relations. Principal among these barriers have been the stifling and retrogressive agrarian relations, which persist in modified forms to date. In the absence of any reliable material base such as could be provided by transformed social relations, the rulers have turned first to foreign aid, then to the 1981 IMF loan and external commercial borrowings, and finally to all sorts of foreign investment, in order to boost growth. Their efforts were not rewarded with much success in the first three decades of planning; but in the era of globalisation and financialisation, large financial flows did succeed in triggering a dramatic rise in India’s ‘growth’ rate, at least for a spell. Side by side, the entire process has resulted in the heightened domination of foreign capital over India.

The colonial legacy
Before British rule, India had a traditional textile industry which produced fine fabrics for its ruling elite; these fabrics also had a sizeable export market, which led to an inflow of bullion. At the outset of British rule, the export of Indian textiles continued as one of the methods for transferring colonial revenues home. Such colonial revenues made a very large contribution to the industrialisation of Britain. Once a modern British textile industry emerged, however, colonial policy destroyed India’s textile industry, and India became an importer of British textiles. However, this destruction of India’s chief export industry left the colonial rulers with a problem: How were they now to transfer their colonial extractions from India to Britain, in terms of real resources? To meet this end, they promoted crops in India for export, such as indigo, cotton, jute, and most of all opium (which they used indeed to penetrate and subjugate China in the nineteenth century). To be able to pay land revenue, the peasant was forced to grow these commercial crops. The British also exported foodgrains on a sizeable scale from India, despite the widespread hunger and famines in this country. India always ran a (forced) trade surplus under British rule. The British ‘paid’ for this by, in effect, charging India for being ruled by Great Britain (the so-called ‘Home Charges’). More bluntly, the continuous trade surplus constituted a forced payment to Britain as a colonial tribute.

At the tail end of their rule, during World War II and the months immediately following it, the British compulsorily took from India goods and services for their troops and even for their civilian population, at the cost of millions of Indian lives. The deferred payment for these acquisitions constituted a debt England owed to India, the ‘sterling balances’. The value of these balances was in fact understated and then, in the period just before the transfer of power, further written down (with the collaboration of Congress leaders). These were the foreign assets with which India began its post-1947 journey. India was also saddled with foreign liabilities, in the form of foreign investments in India which had been made under colonial rule, which the post-colonial regime was not willing to expropriate.

At the time of the departure of the British, India’s exports were largely agricultural or agriculture-related, demand for which was inelastic. India’s limited large-scale industry, shaped by colonial policy, emerged without the development of a domestic machine industry, and indeed without the capability or mind-set among the leading entrepreneurs to properly assimilate imported technology. During World War II the profits of large industrial firms had soared, but they now were desperate for imports of capital goods. Any drive for rapid growth within the existing frame, therefore, promised to run not only an initial trade deficit, but a persisting one.

Pressures for growth
The First Plan (1951-56), hurriedly stitched together, was a puny one, consisting largely of projects already under way, and it did not put much strain on the balance of payments; but it also did not give much impetus to growth of the economy. Big business magnates dreamt of rapid growth in their businesses, and wanted the Indian State to undertake certain large, relatively low-profit or risky investments in order to facilitate the growth of the private sector. The new rulers, for their part, entertained ambitions of becoming the leading power in Asia.

Meanwhile, the masses, having waged a struggle for independence, had high expectations of national development under the new regime. Faced with these mass expectations, the new rulers glanced nervously northward at the transformation taking place in China, and considered how to prevent such developments taking place here. The Congress session at Avadi, and later the Indian Parliament, adopted resolutions declaring that planning should be directed towards the establishment of a socialist structure of society. For multiple reasons, then, the Second Plan was thus greatly more ambitious than the First.

Barriers to growth
However, India faced certain barriers to growth. Of these, the critical one was the agrarian barrier; but the character of its monopolist business class also played a significant role. (Of course, both can be viewed as aspects of a single phenomenon, i.e., the nature of class rule in India.)

Retrogressive agrarian relations cast a pall over the prospects for industrial growth in several ways: in terms of the market, sources of raw materials, the prices of wage goods, and the social-economic environment. At an obvious level, agriculture was a crucial supplier of raw materials to industry (cotton, jute, sugar, and foodstuffs), the constraints on agricultural productivity were also constraints on growth of industries based on these raw materials. Further, an important method of increasing the surplus in capitalist industry is the cheapening of wage goods (thus indirectly reducing the share of wages); another constraint on the growth of surpluses in industry was thus agriculture’s inability to ensure a growing supply to industry of the principal wage good (food) on stable and favourable terms.

However, the most important of the shadows cast by the existing agrarian relations was the appalling poverty of the semi-feudally exploited peasantry: Their widespread poverty clearly narrowed the home market for industrial goods. In the immediate aftermath of the transfer of power, ‘land reform’ was therefore a staple of the rulers’ rhetoric.

There were also subtler effects of the agrarian barrier. The state of agrarian relations offered multiple uses for capital other than productive industrial investment: among them, exploiting fluctuations in production through speculative trade, and exploiting the helplessness of the peasantry through usury. Last but not least, the agrarian conditions offered fertile ground for the perpetuation of the caste system, which in turn contributed to the perpetuation of the existing conditions. This cultural deadweight helped prevent the emergence of many potentially dynamic social forces. It is worth noting that big business in India has long been dominated by a few commercial castes, whose extensive community linkages help them advance and form a barrier to other social groups. Though recent years have seen entrants into the corporate sector from other castes, they too are very largely from the upper sections of the caste hierarchy.

Emergence of balance of payments difficulties
The new rulers were implacably opposed to any radical transformation of agrarian relations. Nor were they willing to lay their hands on either the still sizeable foreign assets, or the assets of the domestic monopolist class, in order to mobilise the resources for growth. What then was to provide the impetus for growth? Within the existing social relations, it appeared that impetus had to come from without.

The comfortable balance of payments witnessed during the First Plan period was short-lived. Rapid industrial growth would involve large imports of capital goods and large foreign exchange expenditure. (Apart from this, the country’s balance of payments was burdened with sizeable food imports and the import-dependent consumer tastes of its elite.) Thus India ran into foreign exchange difficulties hardly a year into the Second Plan. This led to some ad hoc attempts at rationing foreign exchange, increasing drafts on IMF facilities, and the Plans’ rapidly increasing dependence on foreign ‘aid’ (much of it tied to imports from the ‘aid’-givers). Since that time, there has always been a strong undercurrent of balance of payments difficulties, surfacing periodically in the form of crises.

India’s business magnates had emerged during British rule from prosperous mercantile backgrounds, a strange premature form of monopoly capital, surrounded by a sea of small producers. These domestic magnates, with interests spread over a bewildering range of unrelated industries, had always excelled in mercantile activities, financial manipulations and the rigging of Government policy and administrative mechanisms; these activities, rather than the assimilation and further indigenous development of imported technology, absorbed considerable energies of this class (and provided it handsome returns).

While no country has developed without significant initial imports of technology, the Government of India did not systematically plan for and require assimilation and development of that technology; this despite a potential technological workforce of engineers and scientists (and notwithstanding certain central institutes of research). Thus it perpetuated an uninterrupted reign of technological dependence. (By contrast, China, which had obtained substantial Soviet technological and financial aid till 1960, managed by the mid-sixties to achieve self-reliance in various fields and pay off all its foreign debt.)

Where India’s official policy stipulated the substitution of domestic production for imports, that domestic production itself tended to be dependent on substantial imports and technology fees, leading to little saving of foreign exchange, if any. This was all the more so in the case of consumer industries catering to the upper segment of society, whose tastes were shaped by imitation of the west; in such cases the attraction of the product was precisely the fact of its being imported, or at most assembled locally. (This tendency has become an established, even celebrated, feature in the Indian elite’s present accepted pattern of consumption, production and distribution.)

Since the rulers wished to promote ‘growth’ by any means other than confronting agrarian and industrial monopolists, private foreign investment, too, was encouraged. The foreign owned sector flourished and proved more profitable than Indian owned corporate firms, but it did not necessarily bring in much capital. Rather, its holdings grew on the basis of profits earned here, even as it continued to send out substantial sums on net imports, royalties, technology payments, dividends and executive pay.

The Indian rulers had dreamt of big-power status even before the transfer of power, basing their hopes perhaps on the size of their subject population and geographical spread rather than on the country’s economic strength or social consolidation. The contradiction between this shaky base and their outsize ambitions showed up in their disastrous 1962 China war. Defeat, however, only spurred their wounded ambitions, and resulted in ever-larger arms imports, a major contributor to foreign exchange expenditure whose very discussion is near-taboo. As one writer pointed out tellingly in the mid-1960s, “When development is in line with the major political and social groups’ interests, the government can rapidly mobilize large sums which may have seemed non-existent previously. Between 1960-61 and 1963-64, the government was able to increase the defence budget by about 5.25 thousand million Rs. This is a greater increase than has ever been known in the total of public and private investments….”[1]

Impasse of the mid-sixties
Despite the larger and larger components of foreign aid in the Plans, they did not actually bring about the rapid growth desired by big business. GDP growth remained stuck at what became referred to derisively as the “Hindu rate of growth” of 3.5 per cent per annum.  Nor did the Plans bring about the national development expected by the masses.

By the mid-sixties, the bankruptcy of the path of development pursued by the rulers was on stark display. Two years of severe drought (1965-66) resulted in a sharp fall in food production. Rather than impose systematic rationing on domestic food supplies to ensure the minimum needs of the masses were met, the Government chose to make large food imports from the US under PL-480. (As is well known, the US used this hold to twist the Indian government’s arm quite brazenly on foreign policy issues.) The food imports, however, did not prevent a food crisis for the masses.

The other element of the mid-sixties crisis was the balance of payments. Even as the trade deficit swelled, capital inflows were drying up (a condition aggravated by the temporary suspension of foreign ‘aid’ after the 1965 war with Pakistan). Seeing the foreign exchange reserves dwindle, the Government devalued the rupee by a steep 36.5 per cent in 1966. The period was marked by industrial stagnation, labour unrest, and finally major agrarian upsurges. The once-unquestioned dominance of the Congress began its long decline. Against this background, a number of studies appeared from the late 1960s to the early 1980s, devoted to the question of long-term stagnation or structural retrogression in the Indian economy; several of them pointed to its roots in the agrarian impasse, and reasserted the need for fundamental agrarian transformation as the basis for making a breakthrough.

The thrust forward
The rulers, however, addressed these problems from their own class angle. Rather than confront the agrarian barrier head-on and bring about a change in social-economic institutions, they found a technological fix in the mid-sixties: This was to equip the ‘viable farmer’ in relatively well-endowed pockets of the country with high-yielding (high-input, high-cost) varieties of a few crops, canal irrigation, power, subsidised chemical fertiliser, and bank credit; and to procure the output at a remunerative price. The surpluses procured from these pockets were to feed the country; the rest of agriculture was left to its own devices. This shift finally buried the earlier pretensions to ‘land reform’. While foodgrain imports were done away with for the time being (partly thanks to the reduction of per capita foodgrain), the ‘Green Revolution’ had a substantial, and more permanent, import content in terms of chemical fertiliser, fertiliser manufacturing technology, agricultural machinery, pesticides and diesel. Over the longer term, growth of production slowed, while costs to the peasant continued to rise.

In the 1980s, particularly in the latter half, the rulers similarly addressed the problem of industrial stagnation. The new strategy loosened industrial licensing, import restrictions, and the regulation of foreign collaborations, all in the name of making domestic industry ‘efficient’ and ‘competitive’, and thus increasing exports. Industrialists took advantage of this new dispensation to displace labour. However, since multinational firms then period jealously guarded their markets worldwide from newcomer firms from the Third World, and since foreign collaboration agreements with Indian industry generally included explicit or implicit restrictions on exports from the Indian firm to foreign markets, this strategy served more as an open door for capital goods imports rather than an effective boost to exports.

The basic question remained: that of the home market. Since the mass market lacked purchasing power, the solution found by the rulers in the 1980s was to target what could be called the ‘viable consumer’, i.e., the elite and the upper sections generally. As mass consumption goods made up only a small portion of the this segment’s consumption, the rapid growth that occurred was concentrated around luxury consumption. And since the tastes of this upper segment were shaped by the advertising campaigns of firms in the imperialist countries, this strategy involved sizeable imports of goods and technology; often domestic production consisted of mere assembly, or ‘screw-driver technology’.

Fresh balance of payments crisis; structural adjustment of 1991
The new strategy did succeed in raising the rates of industrial growth of this type for some time, but for the above reasons, it also consumed foreign exchange on a large scale. The difference was that, unlike in the past, foreign loans were now more easily available: first, in the form of the 1981 IMF loan, and later, in the form of external commercial borrowings (ECBs), which were now being pushed by banks of the developed world (which, flush with deposits by oil-exporting countries, were looking for borrowers). The end result of this strategy, however, was the doubling of India’s external debt, and a foreign exchange crisis, forcing India to return to the IMF for a ‘structural adjustment’ loan in 1991.

The ‘structural adjustment’ of the early 1990s was supposed once more to make India internationally competitive, and thus repair the perennial balance of payments problem. The trade deficit did shrink for a few years, but began by the mid-1990s to expand once more, as industrial production, particularly the production of import-intensive consumer durables, boomed. The boom petered out quickly, however, and by the early 2000s the average rates of growth of GDP and industrial production in the post-1991 period were in fact no better than in the 1980s.

Growth and crisis
It was in the post-2003 period that massive inflows of foreign capital at last triggered rapid growth – funding consumer debt, fueling luxury consumption, and sparking off investment by a now-optimistic corporate sector. (Strikingly, however, despite all this growth, the share of industry in either national income or employment has not changed much in all of post-1947 India. Rather, the services sector has grown in a distorted way.) These foreign inflows were largely of the relatively footloose finance that is reigning globally. Foreign financial investors now came to own sizeable shares in most of India’s top firms, rivaling promoter stakes. There is no official figure of the current market value of the holdings of foreign direct investors, but it is clear that these too have grown massively; and the opening of more and more sectors to FDI continues. All this has amounted to a massive shift of Indian assets and sectors of the Indian economy to foreign hands, with far-reaching consequences. For example, the opening of the multi-brand retail sector to FDI may have drastic consequences at three stages – not only for the livelihoods of small retailers, but also for small producers, and even for consumers.

Successive Indian governments have displayed neither the capability nor the will to stem illicit outflows of capital, much of which are carried out through systematic mispricing of trade. These sums can only be guessed at: Global Financial Integrity estimated the total outflow from India very conservatively at $213 billion for 1948-2008. If the funds had earned only the rates of return of US Treasury bonds, the present value would be $462 billion – i.e., twice the size of India’s external debt in that year. According to GFI estimates, more than two-thirds of this outflow took place in the period of liberalisation after 1991, and GFI finds a statistical correlation between concentration of income in the hands of the top sections (High Net Worth Individuals) and illicit transfers. Deregulation and trade liberalisation contributed to/accelerated illicit transfers abroad.[2]

Hidden within the figures of India’s exports of goods and services are huge real resource-transfers. As Magdoff wrote, the prices at which international trade takes place, and the costs that enter into those prices, “are themselves the product of the social system and the current as well as the congealed past power relations of that system.”[3] Remarkably, the share of low value-added ‘resource-based’ exports in India’s total merchandise exports rose from one-third in 1990 to one-half in 2008.[4] (These exports were of resources which may be needed for India’s future development, and often have been extracted at terrible cost to the environment and to the people living in those regions.) The overall conditions of agrarian misery and stagnation of industrial employment ensure a steady flow of Indian workers to labour in foreign lands at low wages; those wages are the ‘private transfers’ in India’s balance of payments. India’s exports of software depend on the huge wage differential between software workers here and their counterparts in the developed world; behind that differential are the low wages/incomes of those who produce goods and services consumed by Indian software workers. And these low wages in turn are ensured by the skewed pattern of growth here. The Indian education system, built with large public investment, produces a huge stream of low-cost software engineers, thereby subsidizing software exports — so much so that the head of India’s largest private engineering firm, L&T, complains the software export industry has snatched away all the engineers. (Another giant resource transfer, which does not even figure in our balance of payments, takes place as the best products of the publicly funded Indian Institutes of Technology and other Government-funded institutes are systematically harvested via the selective immigration policy of the US and other imperialist countries.) Further, sizeable explicit and hidden subsidies are provided by the Indian government  to export industries, the most recent example being the special economic zones (SEZs).

Rapid GDP growth during 2003-08 also meant the rapid growth of imports, much faster than the growth of exports. Even as export growth has fallen in the recent period, or even turned negative, import growth has remained high. The growing current account gap has been funded by ever-larger capital inflows (FDI, FII, and external debt), that is, additions to India’s foreign liabilities. The servicing costs of these liabilities also rose steeply. Remarkably, even the post-2008 slowdown did not lead to a sustained fall in imports, which underscores the fact that the social sections who were responsible for the imports were certainly not those whose jobs and spending were hit by that slowdown.

The slowdown can be seen as one expression of the deeper contradiction with which we began, namely, between the ruling classes’ ‘growth’ aspiration and its tenuous material base. Another expression of that contradiction is the vast expansion of the trade deficit and current account deficit in the last decade, requiring giant capital imports to bridge that gap. As pointed out in another article in this issue of Aspects, the outcome of two decades of liberalisation and globalisation is deepened dependence on foreign capital, increased foreign ownership of Indian assets, and strengthened foreign dictation of India’s economic policy.



[1] Charles Bettelheim, India Independent, English edn., 1968, p. 151. (back)

[3] Harry Magdoff, “Economic Myths and Imperialism”, Monthly Review, December 1971. (back)

[4] N.K. Chandra, “Appraising Industrial Policies of India and China from Two Perspectives – Nationalist and Internationalist”, in A.K. Bagchi and A.P. D’Costa (eds), Transformation and Development: The Political Economy of Transition in India and China, 2012. (back)

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