(The following is excerpted from the larger article ‘New Great Depression and India’, from Aspects of India’s Economy, No. 47, March 2009.- Ed/-)

Indian bubble bursts

India’s GDP grew during 2003-08 at its fastest pace in any five-year period. Its rates of investment soared to levels comparable to East Asian economies. Its share market values more than quadrupled. Bankrolled by international finance, India’s private corporate sector began acquiring firms overseas. And the country’s business and political elite began to preen themselves as the ruling class of a new economic superpower.

In the space of a few months everything has changed. GDP growth is falling, and the manufacturing sector has gone into a tailspin; the best-known Indian firms are making losses and cancelling planned investments; the share market has crashed; foreign acquisitions are proving to be albatrosses round the necks of many corporate firms; and the smugness of the ruling elite has evaporated.

The Indian economy, as it has historically developed, lacks a powerful internal dynamic such as would emerge from a healthy, widely dispersed, domestic demand. Especially since the 1980s, it has turned increasingly to inflows of foreign capital to boost its growth. Hence it is systemically vulnerable. The last time the flow of foreign capital (in the form of loans) dried up, in 1990-91, the Indian economy went into a tailspin. It was forced to undergo IMF-directed ‘structural adjustment’ in order to get fresh loans. Since then, its vulnerability has increased manifold as it has ‘globalised’ itself, in the spheres of both trade and finance.

India’s recent bout of high growth (2003-08) was mainly the result of the sea of liquidity from the US. A flood of foreign speculative capital entered India through various routes, with net capital inflows rising to a peak of $108 billion in 2007-08. These inflows fueled a steep rise in bank lending to middle and upper class consumers for houses and automobiles. This in turn fueled demand in a whole range of industries. Inflows of foreign speculative capital blew large bubbles in the share market and the real estate sector, resulting in Indian industrial tycoons and real estate barons being valued (on the basis of that speculation-driven rise in share and property prices) as among the world’s richest men. Industries catering to elite consumption, from airlines to consumer durables, swelled. All these industries are capital intensive and create little employment (with the partial exception of construction).

Meanwhile the sectors that employ the overwhelming majority of the workforce, and that supply most of the items of mass consumption, namely, agriculture and small scale industry, were starved of investment and even credit for working capital; they stagnated or even retrogressed during the corporate sector boom. Thus employment and wages stagnated for a long time into the expansion. When they finally began to rise following a sustained construction boom, the shortage of food (the result of under-investment in agriculture), combined with speculation in agricultural commodities, led to high price rise, snatching away much of the income gains of working people.

After the international bubble-economy burst, so too did India’s bubble economy. It is anticipated that net capital inflows will fall to $10 billion in 2008-09 – a drop of 91 per cent. The Bombay Stock Exchange sensitive index (Sensex) fell from a high of 20,873 on January 8, 2008 to a low of 8,541 on November 20, 2008, and has remained in the latter range since. Monthly industrial growth rates have tumbled from 9.8 per cent in August 2007 to -2 per cent in December 2008. (In fact, as a result of increases in interest rates and a slowing-down of consumer lending by banks since the latter half of 2006, industrial growth rates had already been sliding from the start of 2007 – an indication of how heavily industrial demand depended on cheap and easy consumer credit.)

The Indian rulers see this as a crisis exclusively of private corporate sector liquidity and profitability. Thus they have taken a range of steps to ensure the flow of bank funds to the corporate sector to compensate for the reduction of foreign inflows; further relaxed restrictions on foreign institutional investment (FII) and foreign direct investment (FDI) in different sectors; extended tax concessions and export subsidies; forced the public sector financial institutions to prop up share prices by making purchases; boosted demand for the real estate and auto industries by forcing public sector banks to make home loans and auto loans cheaper and more easily available; and reduced the price of aviation turbine fuel steeply to aid private airlines (in contrast to the moderate reduction in diesel and petrol prices). There are only two measures of direct spending in 2008-09, and both were paltry: Rs 200 billion of additional Central Government spending, and an increase in the limit that state governments could borrow.

However, in an unremittingly grim climate for profits, these measures are unlikely to trigger a fresh investment boom by the private corporate sector, especially as the last boom will have left firms with excess capacity. Rather, the funds and concessions will be used by large firms to shore up their shaky – in some cases perilous – financial position (for example, many of the real estate firms may in reality be insolvent, once one factors in the fall in land prices). At the same time, these measures will reduce tax revenues, divert bank credit from the sectors which are in dire need, subsidise luxury consumption (such as air travel and automobiles), and permit further foreign control in sectors hitherto restricted.

The high growth of recent times was in itself of no benefit to the people, since the jobs and incomes it provided in a miserly fashion with one hand it took away with the other. Moreover, growth was based on further and further skewing of the economy toward elite demand, powered by foreign inflows; this cannot be sustained forever. (No doubt, the rulers and their economists imagined India’s economy, and even its political life, could permanently ‘decouple’ from the condition of the majority of its people.) Finally, built into the pattern of this rapid growth were all sorts of undesirable, wasteful and even harmful economic activities, such as the proliferation of automobiles and air travel, urban infrastructure for automobiles, corporate health care, organised retail, corporate agriculture, real estate usurpation of agricultural land, privatisation of water and other natural resources, and so on.

While the people as a whole did not benefit from this pattern of growth, the collapse of that growth will deal an immediate blow to many – in the form of retrenchments of workers and depressed agricultural prices for peasants. Hundreds of thousands of workers are being retrenched in the export sector – textiles and garments, diamond polishing, leather goods, tourism, etc. Lay-offs and retrenchments are also under way in various sectors catering to elite and middle-class demand, such as automobiles, hotels, airlines, consumer durables, and most importantly construction. The producer prices of agricultural commodities, which only seven or eight months ago were soaring, are now set to fall with the slackening of demand and the transmission of international price signals to India; the peasantry is in for another long spell of depressed prices. (Yet the long-term trend of poor growth of agricultural production, and the grip of private trade over agricultural commodities, have led to prices of food remaining high; in fact, food price inflation has even been climbing for the last several months.) As near-insolvent financial institutions in the West attempt to shore themselves up by selling off their investments in the Third World, capital outflows from India have risen. The rupee has fallen from Rs 39.37 per dollar in January 2008 to nearly Rs 52 today.

However, what this collapse underscores is that this growth was in itself unviable.

Directly contrary to the concern of India’s rulers, the concern of the Indian people is not to find ways to attract fresh flows of foreign capital or reflate the corporate bubble economy. Rather these schemes are directly against their interest. The people’s interest lies in making immediate demands such as the following: State investment in, and support to, agriculture and related activities; credit, financial support, and other necessary assistance (inputs, marketing) to small non-agricultural producers (small and micro industry, handicrafts/handlooms); a massive increase in direct employment generation by the State; the universalisation of the Public Distribution System (in three senses: actual coverage of all areas and families; provision of the full requirement for a family; and inclusion of all basic needs, not merely of cereals); universalisation and a decent level of public health care; construction of adequate schools with employment of a full contingent of qualified teachers; ensuring of proper housing for the urban masses; and many other such measures.

At the same time, the people’s interest lies in demanding that the country’s economy be no longer subjugated to the flows of foreign capital, or oriented to external demand or luxury demand at the cost of genuine national and democratic development. And finally, as the long-term paucity of employment persists, peasants’ demand for access to land and other rural assets for cultivation must come strongly to the fore.

Of course, this amounts to demanding a change of the political economy itself. In the present times, as the global crisis discredits the capitalist system itself, the demand for such a change will win a wider and wider circle of adherents in these countries. It is the role of sincere students of political economy to explain to the people the real causes of the current crisis, and the need to struggle for a political economy that can direct the country’s social surplus to meet the real social needs of the present and future.