No. 63, April 2016

No. 63 (April 2016)

bulletGlobalisation without Global Demand

bulletPrivate Investment: The God that Failed

Globalisation without Global Demand

Three years after Narendra Modi was handpicked by the corporate sector for prime ministership, and a year and a half after the corporate sector bankrolled his victory, the Indian economy remains in a slump. The latest series of official Gross Domestic Product(GDP) data paints an unconvincingly rosy picture of growth, but these have been widely questioned, even within the establishment. Most other conventional economic indicators point to stagnation or deterioration.

This situation has created confusion and some alarm among ruling class circles. Different interests are coming to the fore on how to tackle the crisis. These differences reflect different shades of interest within the ruling classes, as well as between the native ruling classes and international capital. While there is no fundamental contradiction between these interests, there are secondary differences, and these are worth noting, for they shed light on the underlying situation. There is, however, a real chasm between all these interests and the interests of the masses of people. (We have discussed similar themes in Aspects no. 50.)

One set of policy-makers, reflecting largely the interests of the Indian corporate sector, is agitated at the severe paucity of demand. This demand depression is depressing the prices of their output and shrinking the absolute size of the surplus that accrues to them. They want an increased stimulus to growth, in the form of (i) lower interest rates and (ii) increased Government spending, even if that means revising temporarily the present schedule of bringing down the fiscal deficit (i.e., Government borrowing). We have discussed this view in a separate piece, “Private Investment: The God that Failed”.

Another view, reflecting largely the interests of foreign investors, particularly foreign financial capital, wants the Reserve Bank to keep interest rates high (in the name of checking inflation) and wants the Government to stick rigidly to its programme of deficit-slashing. These interests claim that eventually investment and growth will revive on their own; all that is needed is to remove all restraints on investment and profit-making, and wait patiently for the upturn. At any rate, the depression is presenting these sections some opportunities to buy assets at cut-rate prices.

In reality, there is no absolute dividing line between the proponents of these two views; they overlap considerably, and individuals shift from one side to the other. And even the first view, if adopted, would not do much to revive demand. In the following piece we look at the arguments of the RBI chief, representing the second view. Before that, let us cast an eye over the state of affairs, as revealed by the RBI itself.

A Portrait of Stagnation
The Reserve Bank’s September 2015 Monetary Policy Statement lays out the picture of the current slump.[1] It notes that global growth appears to be slowing in the third quarter of 2015. The slowdown is concentrated in the so-called “emerging” economies (which now appear to be submerging). The recession in Brazil and Russia is set to deepen, South Africa is on the edge of recession, and the deceleration in China is growing steeper (it has since become precipitous, with the latest figures showing that the Chinese economy is growing at its slowest rate in a quarter of a century). Nor is growth in the advanced economies strong; it could “taper”. World trade, which had long grown faster than world GDP (indicating the growing ‘globalisation’ of economies), is now growing considerably more slowly than GDP. This indicates that economies are turning inward, and setting up barriers to imports. According to the Statement, “the current soft patch in the global economy is expected to continue in the near term as downside risks have increased significantly.”

By September, India’s exports had been contracting for 10 months (and have continued to do so thereafter); while the volume of exports is up, prices have fallen so sharply that the total value of exports is down. Moreover, countries which import goods and services from India are setting up non-price measures to curb imports. The earnings of the much-vaunted information technology (IT) sector are also damped by declining global IT spending. While India’s non-oil, non-gold imports too have fallen (due to the weak state of domestic demand), they have not fallen as sharply as India’s exports. A further danger is that, as industries in other countries suffer from excess capacity due to the global slump, they are willing to dump their goods in India at lower prices. This makes it harder for Indian firms to compete, and in sectors such as steel, some Indian firms have stopped servicing their bank loans.

The RBI acknowledges that aggregate demand in the Indian economy is weak, and there was a sharp sequential slowdown in April-June 2015. The growth in bank lending has slowed to a crawl. The growth of direct tax revenues – taxes on income of the corporate sector and the better-off – is “subdued”. Indirect tax revenues – collected from the vast majority – are up, but that is largely on account of increased rates, not expanded activity. Government consumption spending is on a tight leash, and so cannot impart a stimulus to aggregate demand.

Construction is slowing, as manifested by low demand for cement, and a large inventory of unsold housing. The Reserve Bank’s quarterly survey of capacity utilisation in the manufacturing sector reveals a continuously declining trend from 2011-12 to 2014-15. The credit rating firm CRISIL reports that in 10 out of 12 sectors, capacity utilisation is at a five-year low, and it projects that 2015-16 will see a fall in net capital expenditure by private firms.

Two successive years of poor rainfall portend a fall in agricultural growth and a rise in food prices. Falling sales of tractors and two-wheelers are pointers to the weakening state of the rural economy. Rural wage growth has slowed sharply; by the end of 2014, it appears it was negative in real terms (i.e., after discounting for inflation).

Against this background, the few ‘bright spots’ in recent data – the smart rise of passenger car sales, air passenger traffic, furniture and apparel sales, investments related to the e-commerce industry – indicate a widening gap between rural and urban consumers, particularly with a section of well-off urban consumers still able and willing to spend. However, this section appears to be too narrow a base for a full-fledged industrial revival.

Most importantly for the corporate sector, profits have not revived. Net profit contracted in 2014-15 for the fourth consecutive year in the RBI sample of the private corporate sector (-16.8, -2, -5.7, -0.7).[2] Large firms were still able to do reasonably well, because their input costs fell faster than their sales; but the fall in their input costs merely points to worsening conditions elsewhere in the economy (among those who produce those inputs). The picture is much bleaker for the smaller firms in the sample, for whom sales fell faster than their input costs, leading to losses at the operating level itself. These smaller firms are therefore unable to earn enough to service their debts, and will find it difficult to survive if the slump lasts much longer.

It appears that India’s corporate chieftains did not anticipate that the slump would last so long. Stock market analysts, as is their wont, have repeatedly predicted a turnaround in the near future, only to be repeatedly proved wrong.[3]Establishment economists are busy finding explanations for the delay in their much-anticipated recovery, as part of their search for a way out of the slump.

Globalisation, in Theory
In December 2014, a rather unusual statement on the economic slowdown was issued by Raghuram Rajan, governor of the Reserve Bank of India. His statement unintentionally raises questions about a notion which has been at the core of Government policy over the past two decades, namely, the benefits of ‘globalisation’.

Those who determine the country’s economic policies have long inundated us with arguments for increasing ‘globalisation’ – by which they mean the integration of the national economy with the international economy through trade and capital flows.[4] Neoliberal globalisers claim that, in order to grow rapidly for long periods, developing economies must open up, turn outward rather than inward.

Globalisers do not deny that such opening up leads to the growth of imports. But they claim that, if the economy exploits its area of ‘comparative advantage’ – typically, in the case of an underdeveloped economy, its cheap labour power – its exports of goods and services will grow faster than its imports. Globalisation, they say, allows developing countries to overcome the constraints of their domestic markets, which, after all, are poor by definition. This globalising process, they claim, leads to a net increase in income, reducing poverty.

This is the theory behind Modi’s slogan of “Make in India”: invite foreign capital to invest in India, to employ its labour, and export the output. (And for that, do away with restrictions on foreign investment, facilitate corporate acquisition of land/natural resources, and remove all barriers to lowering wages.) “Come ‘make in India’, I appeal to the world.” Modi declared on August 15, 2014 (‘Independence Day’), “Sell anywhere but manufacture here.”

Rent-a-Womb Economics
There is nothing very new about ‘Make in India’, except perhaps the heavily marketed slogan and website. The rulers have over long years made precisely this case for opening up to foreign investment. The promised bonanza of industrial employment for workers and the promised narrowing of the trade deficit have never materialised, rather the reverse, though some bonanzas have indeed materialised for private investors. Far from from bringing about a shift to labour-intensive production (to exploit India’s comparative advantage in plentiful labour power), the period of globalisation has seen a steep rise in capital intensity of production, i.e., fewer jobs per unit of capital.

For that matter, ‘Make in India’ is essentially a new version of the Special Economic Zones (SEZs), a scheme introduced in 2000 under the BJP-led NDA government, and taken forward by the Congress-led UPA government with the SEZ Act of 2005. The SEZs were specifically delineated export-oriented duty-free enclaves, deemed foreign territory for the purpose of trade operations, duties and tariffs. They were to enjoy world-class private infrastructure and, tacitly, the effective suspension of labour laws. Successive governments promoted SEZs as growth engines that would attract investment by multinational corporations, boost India’s manufacturing, augment exports and generate employment.

However, as the Comptroller and Auditor General observed in 2014,“Ministry of Commerce and Industry has not prescribed any measurable performance indicators in line with its objectives and functions, for the real socio economic benefits for citizens and the State.” Indeed, the CAG found that, in the sampled SEZs, the shortfall in investments (compared to projections) was 59 per cent; in exports 75 per cent; in net exports 80 per cent; in employment 93 per cent. Unsurprisingly, the CAG could not find, in the period since the passage of the SEZ Act, any discernible improvement in India’s GDP growth, export growth, or employment growth. (He could have pointed out, indeed, that India’s merchandise trade deficit rose from $17.8 billion in 1999-2000 to $91.5 billion 2007-08 and $147.6 billion in 2013-14.[5]) Large benefits, though, accrued to the promoters of SEZs. The CAG caustically commented that “Land appeared to be the most crucial and attractive component of the scheme…. Many tracts of these lands were acquired invoking the ‘public purpose’ clause.” SEZ promoters also enjoyed staggeringly large fiscal subsidies: the Ministry of Finance, in a study, estimated that tax holidays granted to them between 2004 and 2010 came toover Rs 1,75,000 crore.[6]

Perhaps Modi’s ‘Make in India’ will attract more foreign investment than the SEZs did, but its effect on manufacturing, exports and employment is unlikely to be any better, and its hidden subsidies to Capital are likely to be even larger.

At any rate, the claims of the neoliberal globalisers are hollow, both theoretically and empirically. While each country needs some relations with the global economy, any benefit to the weaker partner from these ties depends on its being able to set its own terms. For an underdeveloped country to deal on such terms requires that its rulers are able to define and defend the country’s national interest. This in turn hinges on the prior transformation of the country’s own political economy, i.e., its internal class relations, encompassing the development of its internal market and its indigenous capabilities. The expansion of the market of the underdeveloped countries, then, is a profoundly political question, a question of the incomes, employment, and political power of the vast mass of working people.

By contrast, the “Make in India” type of ‘globalisation’ merely benefits big capital, particularly globally mobile capital, at the cost of the labouring people. In Ashok Mitra’s acerbic phrase, it is a “rent-a-womb” economic policy.

Rajan’s Warning
Strangely, the ardent neo-liberal economist and present RBI governor, Raghuram Rajan, has recently poured cold water on the hope that globalisation will lead to growth in India. He does so not on theoretical but on purely practical grounds. The world economy, he observes, appears now to be not merely in a temporary slump, but in a state of ‘secular stagnation’: “overall, there is a palpable sense of gloom in the industrial world [i.e., the developed economies], a belief that growth is unlikely to be strong enough to satisfy for the foreseeable future.” (emphasis added)[7]

This has grave implications for the Third World, Rajan says: “slow growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future…. Slow industrial country growth has made more difficult a traditional development path for emerging markets – export-led growth…” Moreover, he points out, changes in technology have enabled industrial countries that once “offshored” their production of goods and services to “re-shore” some of it today, i.e., to bring it back home. (India’s much-hyped information technology sector has been witnessing a slowdown, partly as a result of such trends.) Finally, he points out, “when India pushes into manufacturing exports, it will have China, which still has some surplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as it was for the Asian economies who took that path before us.”

Rajan therefore warns: “There is a danger when we discuss ‘Make in India’ of assuming it means a focus on manufacturing, an attempt to follow the export-led growth path that China followed…. the world as a whole is unlikely to be able to accommodate another export-led China…. If external demand growth is likely to be muted, we have to produce for the internal market.” (emphasis added)

What Becomes of Export-Oriented Policies?
This is a remarkable admission. For the last two decades, we have been told that the solution to every problem faced by the economy is to globalise more (any problems which then arise are put down to inadequate globalisation, incomplete ‘reforms’). So it is rather startling to be told by one of the high priests of the neoliberal faith that future growth will have to come, not from the external, but the internal market.

What are the policy implications of this change? Let us look at the policies traditionally prescribed for export-oriented growth – policies which will no longer work, since we cannot hope for such growth now “for the foreseeable future”, according to Rajan.

(i) One oft-repeated prescription of globalisers is that, in order for India’s exports to compete with those of other countries, workers’ wages must be kept low (the polite term is ‘competitive’). For example, India’s garment exports can compete in the international market only if wages of garment workers in India are at levels comparable to the wages of workers in, say, Bangladesh. In order to ensure this, keep legal minimum wages low, place hurdles in the way of forming unions, dismantle protections against retrenchment and use of contract labour, dismantle labour inspections, and wind down public employment schemes. Similar policies are prescribed by international financial institutions to all underdeveloped countries. This leads to a ‘race to the bottom’, whereby all of them reduce their wages, collectively benefiting international capital.

Globalisers do mention the need to improve the skill levels of India’s workforce, but the skills they stress are those needed to cater to developed-country demand. In essence, then, this too is a ‘race to the bottom’, by increasing the pool of skilled workers available to global capital. We have already seen the results of this policy: engineering colleges produce 10 times as many engineers as can find software jobs. Entry-level wages for the information technology industry have remained the same for the last seven years, even as prices have risen 45-50 per cent, amounting to a steep drop in real wage levels.[8] There is pressure to upgrade local skills to meet the changed pattern of global demand, but this promises merely to reproduce the same results after a little while.

(ii) Another such globalising prescription concerns the overall level of domestic demand. If there were ample demand in the domestic market, Indian producers would find it more attractive to sell their goods at home than try to compete internationally. That, globalisers argue, would dampen exports. And so the IMF and World Bank have always recommended that, in order to promote exports, the Government should suppress domestic demand (this is termed “curb excess demand”). For this it should keep Government spending low (hence the constant refrain about cutting the fiscal deficit) and keep interest rates high.

(iii) A necessary part of globalisation is to open up the economy to a range of imports. This is meant, among other things, to force domestic producers to compete with international producers, either by becoming more efficient in their existing production lines or by shifting away from goods/services in which they lack ‘comparative advantage’ internationally, and into producing those goods/services in which they are ‘internationally competitive’. This process, globalisers claim, actually aids the expansion of export markets. Rather than restrict imports, say globalisers, the need is to integrate the country into global supply chains, as have China and southeast Asian countries. This hinges on persuading multinational corporations (through the provision of generous hidden and explicit subsidies) to locate some part of their supply chains in India.

(iv) It follows that globalisers recommend opening up to foreign investment in all sectors, even though this may lead to foreign takeover of firms/sectors and increased outflows on account of dividend, royalties, and imports. Globalisers argue that foreign investors will use India as a production base for exports, thus, in the net, earning foreign exchange for India and generating employment.Toattract foreign investment, it is necessary to reduce corporate income tax, andprovide cheap land and natural resources on a platter.

A glance at the Government’s current economic policies reveals that they are scrupulously following all the above prescriptions. Labour laws are being revised, labour inspections are being discontinued, the rural employment scheme is stagnating (or rather, being slowly wound down). Government spending is being brought down, and the RBI has kept real interest rates[9] high for a very long period. Domestic producers in a number of sectors are facing an onslaught of cheap imports. More and more sectors are being opened to foreign investment, corporate tax rates are being reduced (indeed, the finance minister is discontinuing earlier efforts by the tax authorities to recover legitimate tax dues from tax-evading multinationals, such as in the Vodafone case), and the Government is trying to amend laws to facilitate the handing over of land and resources to corporate investors.

Expanding the Internal Market
It is in fact baseless to claim that, even in favourable global conditions, the above measures for export-oriented production would actually lead to India’s industrial development, or even to a bridging of its current account deficit.

Take, for example, the constriction of domestic demand prescribed by glib globalisers. Far from promoting export, such constricted demand may prevent a local firm from achieving economies of scale necessary to be able to export competitively. Internationally, firms often export at their marginal cost of production (that is, they cover their costs in the main with domestic sales, and export at prices which cover the cost of just the additional output, beyond the domestic sales). But the ability to do that depends on enjoying a sizeable domestic market.

The operations of foreign investment firms in India, at the aggregate level, have in fact led to a drain of foreign exchange, which has risen particularly steeply in the period of neoliberal ‘reform’. Thus an initial inflow of FDI results in a much larger net outflow over a period.[10] Far from producing a trade surplus, the ‘withdrawal of the State’ as part of neoliberal globalisation led to a steep growth in the trade deficit in manufactured goods.[11] Indeed, import liberalisation, coupled with the withdrawal of Government support, has damaged domestic industry. It has contributed to “premature deindustrialisation” (a situation in which, well before experiencing industrial transformation along the historical lines undergone by the developed countries, the shares of manufacturing in total employment and output get stuck at very low levels).[12]

Those who produce glib projections of India increasing its exports gloss over a crucial point: India’s large workforce constitutes a considerable portion of the global workforce. For India to absorb a significant portion of its workforce in export-oriented production would require it to expand its share of world exports dramatically; this would require a corresponding reduction of other countries’ exports. But these competitors would surely not sit on their hands, but respond with similar strategies to retain their share of trade.

Now, let us set that question aside and instead ask: What would the arguments of the globalisers imply for the contrary situation, when export prospects are bleak and the domestic market alone has the potential to serve growth?

Consistency would demand that, when growth must be powered by the domestic market, the globalisers’ policy prescription should have been the reverse of that for export-oriented growth.That is, it logically should have been to boost domestic demand, and for that to:

(i) Increase Government spending, particularly public sector agricultural investment and employment generation, even, if necessary, through higher fiscal deficits.

(ii) Lower interest rates and target credit to those producers (such as peasants and small enterprises) who are prevented from producing more for lack of access to credit.

(iii) Bring about a rise in workers’ wages.

(iv) Restrict imports through tariffs and other measures, so as to protect domestic industry and prevent the ‘leaking out’ of domestic demand (this becomes particularly important since foreign producers will, during a recession, be willing to export at very low prices).

(v) Restrict foreign investment aimed at capturing the Indian market from domestic producers.

(vi)Tax private corporations and wealthy individuals in order to direct their income and wealth away from unproductive activities, and toward productive investment and socially desirable ends.

All these are not radical or revolutionary measures; they do not address the fundamental task to be addressed in order to expand the domestic market, namely, radical land reform. The above measures are merely the logical corollary of the arguments of the globalisers themselves, now applied to a situation in which global demand is unable to power growth.

Ideological Stand
However, Rajan does not prescribe any of these measures to expand domestic demand. Quite the contrary, he actively opposes them. He recommends a continuation of the existing policies: more openness to foreign investment, continued reduction of the Government’s fiscal deficit, a continued tight-money policy by the central bank, more tax benefits to the better-off, no increase in import tariffs, and so on. Beyond this, he says, the Government should merely focus on creating an environment for private enterprise – creating infrastructure, reducing the ‘cost of doing business’, integrating tax rates across states, improving ‘human capital’ (i.e., the educational levels and skills of the workforce), and so on. The belief behind such an approach is that the salvation of the economy lies solely in the hands of private investors (domestic and foreign) alone; all that should be done is to make the environment as hospitable as possible for such investment, and wait.

Accordingly, in Rajan’s September 2015 Monetary Policy Statement, he prescribes for the demand-constrained economy more of precisely the same medicine which has been administered till now:

For India, business and regulatory uncertainties embodied in delayed project approvals and large gaps in implementing infrastructural and other large scale projects have been identified as the major factors driving the recent slump. If this view is accepted, then resolute fiscal policy [read: reducing the fiscal deficit] and administrative/regulatory actions are urgently required to contend with the spectre of stagnation. It is only a committed policy stance aimed at removing infrastructure bottlenecks, addressing factors impeding stalled projects, rekindling cash flows, improving business conditions and enhancing human capital that will set the economy on a sustainable high growth path…. The government’s policy focus on expeditious land acquisition, speedier environmental and other clearances is yielding dividends in the form of a decline in the stock of locked investment as well as in the number of projects…[13]

This prescription ignores the main question, one which indeed is posed in the rest of the same Monetary Policy Statement: the paucity of demand. It behaves as if the motor of the economy has stopped, not for lack of fuel, but merely because some gears got stuck; oil the machine, and it will start running smoothly once again. (As we point out in a separate piece, the Economic Survey 2014-15presents data which effectively refute this.)

Clearly, then, Rajan’s policy recommendations have little to do with the actual circumstances prevailing, and the results to be expected. Regardless of whether he sees scope for export-oriented growth to succeed, his policy recommendations remain rigidly the same. In other words, they are purely ideological, set according to the interests of global and domestic big capital.

What then is the significance of Rajan’s warning? It appears his concern is not to bring about a change in policy, but to warn against nursing false hopes. Since Rajan acknowledges that today growth is not going to be powered by global demand, and he actively opposes the idea that the Government should spend in order to stimulate domestic demand, he knows that prospects for growth are bleak. In essence, Rajan says the Government should focus on making conditions good for big business, and wait for private investors to invest.

But private investors by their very nature do not act collectively, nor with public benefit in view. They focus solely on their individual profits, and hence tend to hang on to their cash when demand is depressed. What if they decide to wait till demand improves? When so many individual investors refuse to invest, that itself perpetuates a situation of low demand, which deterred them from investing in the first place. This also means low employment and low incomes for the mass of working people.What perhaps worries Rajan is the possibility that, in such a situation, domestic political pressure would build up for reversing the existing policies, i.e., intelligent public pressure would rise for reviving the economy through Government expenditure, wage growth, protection from imports, and the like.

Thus, when Rajan warns that “growth is unlikely to be strong enough to satisfy for the foreseeable future” and yet demands adherence to the existing policies, he is actually making a political statement: that we must be satisfied with unemployment, falling wages, falling incomes of peasants and other petty producers, and so on, until these accumulated sacrifices have appeased the gods of global capital and persuaded them to revive investment.

Correspondingly, those who do not pray at the altar of these gods, but for whom the interests of the people are paramount, should draw the political lesson that the present political-economic system is now incapable of reviving the employment and incomes of the vast working masses, and needs replacement.




[1]Raghuram Rajan, “Monetary Policy Statement”, September 29, 2015.

[2] “Performance of Private Corporate Business Sector during 2014-15”, RBI Bulletin, October 2015.

[3] Shefali Anand, “When India Analysts Make 2016 Stock Predictions, Don’t Bank on Accuracy”, Wall Street Journal, 27/12/2015.

[4] While consistency would demand that globalisation include flows of labour power too, i.e., that workers be allowed to move freely across the globe in search of higher wages, in fact, under the rule of actually existing globalisation the entry of workers into higher-income economies continues to be carefully regulated by the advanced countries according to the economic and political interests of their ruling classes. This has been highlighted recently by the furore over a relatively small number of refugees entering Europe from war-torn countries in Africa and West Asia. Even though outsourcing has partially ‘globalised’ labour, barriers to the flow of workers across borders are maintained by the ruling classes of the imperialist countries (i) to periodically restore some measure of social and political stability and (ii) to keep down wages in the Third World.

[5] Reserve Bank of India, Handbook of Statistics on the Indian Economy, 2013-14, Table 142.

[6] Report of the Comptroller and Auditor General of India for the year 2012-13, “Performance of Special Economic Zones”, December 2014.

[7] Raghuram Rajan, “Make in India, largely for India”, Bharat Ram Memorial Lectureon December 12, 2014 in New Delhi.

[8] “Little change in salaries of entry-level IT jobs in India”, Economic Times, 16/4/15. . The article quotes the global human resources head of one of India’s top five IT firms as saying, “Given the glut of engineers at the fresher level, we can afford to keep salaries at the same level for the foreseeable future.”

[9] The ‘real interest rate’ is the nominal interest rate minus the rate of inflation. Even if the rate of interest is reduced, if the rate of inflation falls even more sharply, the real interest rate rises, which means that in real terms borrowers are bearing a heavier burden of interest payments. If one looks at the inflation rate relevant to producers, it becomes clear that the real interest rate has not fallen but risen, despite the RBI’s interest rate cuts. See Arvind Subramanian, “At the rate of? Measures of inflation make monetary policy a fraught issue”, Indian Express, 21/7/15.

[10] See Swati Verma, “Current Account Fallout of FDI in Post-Reform India”,Economic and Political Weekly (EPW), 26/9/15.

[11] Sudip Chaudhuri, “Manufacturing Trade Deficit and Industrial Policy in India”,EPW, 23/2/13.

[12] Sudip Chaudhuri, “Import Liberalisation and Premature Deindustrialisation in India”, EPW, 24/10/15.

[13] Rajan, “Monetary Policy Statement”.



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