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Mainstream, VOL LII No 1, December 28, 2013 - ANNUAL 2013

The Economic Chakravyuh — Who Will Bell the Cat?

Sunday 29 December 2013, by Kobad Ghandy


This is another lengthy article Marxist-Maoist thinker Kobad Ghandy sent from Tihar Jail where he is still lodged; it was sent sometime ago but could not be used earlier on account of space constraints.

There is panic in the air—a crashing rupee, falling growth rates and a spiralling current account deficit (CAD)! Black Friday (August 16) reflected the nervousness all around with the stock exchange falling four per cent, rupee declining to an all-time low over Rs 62 to the dollar, and gold prices rising a huge Rs 1810—all in a single day. That too this happened after the Independence Day speeches which sought to paint a positive picture of the economy.

And to stem the crisis all they have to offer is more of the same medicine which, in the first place, brought on this crisis. No attempt is being made to seriously look for the cause, to evolve effective solutions. Knee-jerk reactions to a precarious situation can only complicate matters further.

With elections approaching, the Indian political class is faced with a unique opportunity—to put forward an alternate set of policies that will effectively pull the country out of the economic morass into which it has been pushed. Rather than being anti-this and anti-that and raising petty issues against each other, it would be far more constructive to state policies that will revive the economy in a direction that betters people’s lives. One’s patriotism is not proved by how loudly one shouts against neighbouring countries, but what concretely one seeks to do to better the lives of the bulk of our people who live in excruciating poverty, and the 10-15 per cent middle classes who see their real income vanishing due to increasing unemployment/under-employment, inflation and disappearing savings due to low interest rates and fake schemes.

There needs to be concrete policy statements to tackle these problems, rather than abstract talk of ‘development’, aam aadmi, new hope etc. etc. There can be no ‘new hope’ with old policies. Corruption, though a serious issue, is more a symptom rather than the disease itself. True national policy entails saving our masses from hunger, sickness and premature death; as also protecting our land, water resources and forests from further devastation. These twin set of policies should be the central goal of any political formation.

In this article I shall first elaborate briefly on the depth of the crisis we face today. Next I will try and show how our economy has got stuck in the chakravyuh of its own making. In this framework I shall then touch on the Amartya Sen-Jagdish Bhagwati debate. Finally I will try and put forward some policies, the direction of which could hopefully set our country and people on the path of true inclusive growth.

The Crisis

On Monday August 19 the rupee further crashed by 148 paise—the biggest single-day fall ever—to over Rs 63 to the dollar. This, in spite of a series of desperate measures by the RBI and Finance Ministry! It seems to be out of their control, and the government’s economists are giving contradictory suggestions every other day.

The problem with these policy-makers is, ostrich-like, they have sought to give the impression and repeat the mantra that “the fundamentals are sound”. Though the writing has been on the wall for quite some time, political compunctions and media hype sought to bury the truth. Economists, columnists, editors, ‘experts’—all trained on the neo-liberal model—sought some explanation or other to cover up the reality. The gloss of five-star culture and billionaire growth together with a booming stock-exchange helped cover the grime below. Now, the muck can no longer be camouflaged as the slime is spilling out onto the streets creating a stench the gloss can no longer hide.

Besides the immediate crisis in the rupee and BoP (Balance of Payments), the “fundamentals” are in fact terribly weak. India’s GDP growth rate for 2012-13 was five per cent, back to the pre-2003 levels—with no sign of recovery. In fact Morgan Stanley predicts a 3.5 per cent growth rate in the current fiscal. Manufacturing in the last financial year witnessed a growth rate of a mere one per cent, while in the current financial year it has gone into the negative—-2.9 per cent in May 2013 and -2.2 per cent in June 2013. The auto sector witnessed its worst decline ever in the last quarter of 2012-13 (January-March 2013) with a fall in sales of 14.6 per cent.

Indian banks are in a precarious state with accumulated bad debts (mostly by large corporates) reaching Rs 1.56 lakh crore (end December 2012). Many may have collapsed by now if they had not been continuously bailed out by the government, at the taxpayers’ expense—euphemistically called re-capitalisation. What is worse, these continue to rise. So, for example, by end June 2013 the bad debts of the SBI (largest bank) sky-rocketed to Rs 60,089 crores—that is, a huge 5.6 per cent of the total advances. In addition, the loans of just ten big business houses soared by 15 per cent in the last fiscal to Rs 6.3 lakh crores; of these 40-70 per cent were in foreign currency. Three of these, including Reliance ADA, have already been restructured.

As a result of this decline in industry, the boom in employment (only seen in the service sector) is also drying up. Overal, there was a drop in recruitment business by 20 per cent in 2012 (over 2011). This continues till today. The Sunday Guardian recently reported that all sectors have been laying off workers on a large scale—and not just the export sweatshops, but even the bluechip firms, including IT, ITES, insurance, retail, real estate etc. The situation in the unorganised sector is even worse. In the past five years, employment in the non-agricultural unorganised sector has grown by just 23 lakhs—that is, less than 0.2 per cent per year. In the previous five years it had grown at close to five per cent per year. This means 3.4 crore people who should have got jobs are now unemployed.

If we now turn to the agrarian sector, where the bulk of our people live and where exists our natural wealth, we witness devastation all around. Harsh Mander (once a member of Sonia’s NAC) put it succinctly (The Hindu, March 10, 2013): “The Indian countryside has been transformed into this wasteland of near-terminal despair and increasingly impossible survival, by new technologies, forced integration with globalised markets and an uncaring state. For a sector that employs 51 per cent workers, contributes 14 per cent (actually 12 per cent now) to GDP, the state invests as little as 5 per cent of public expenditure. No wonder that tens of thousands of farmers each year drink pesticide or hang themselves, and millions of the young flee, when they can, wherever they can.”

Last year the growth in this sector was a mere 1.1 per cent. In addition, because of ecological destruction, droughts or floods have become a regular occurence. Due to a scorched earth policy regarding our land and water, the top soil has been made inert, and both surface and subterranean water resources have been badly depleted. Forests, which are the major source for catchment and water retention, have been thoroughly denuded. The Ministry of Environment itself states that India is losing 135 hectares of forest per day—that is, 50,000 hectares per year—to ‘developmental’ projects. Clearly more Uttarakhands await us!!

Finally, both the rural and urban population have been badly hit by the continuous double-digit inflation, with food inflation hitting astro-nomical levels.

Meanwhile, there is gloom all over: farmers’ suicides continue unabated; children killed and fall sick through contaminated mid-day meals in Bihar and all over the country; children around the country fall ill with the government’s free non-tablet distribution; rape and brutalisation of women continue unabated; thousands killed in Uttarakhand and many thousands more missing; 18 Navy personnel (including three officers) killed in the worst ever submarine disaster since 1947 pouring Rs 500-600 crores down the drain; the prestigious GSLR ISRO launch catches fire even before take-off; pnozi schemes in West Bengal and elsewhere swallow up lakhs of middle-class savings pushing hundreds to suicide; corruption reaches peak levels with not a single person convicted;... The list could go on and on and on. In all UN human indicators India continues to be at the rock bottom—whether poverty, disease, gender sensitivity,... And with the caste-based honour killings reaching epidemic levels one would seriously have to consider whether we are living in the 21st century or in the Middle Ages!!

But, let us leave these social indicators, too agonising if one went into personnel details, and go to the immediate economic chakravyuh wherein the country has been dragged to the precipice.

The Chakravyuh

Ironically, while our business tycoons and politicians are busy draining the country of our foreign exchange (through regular five-star trips abroad, purchase of mansions, yachts etc. abroad, billions of dollars being spent in hiring foreign personnel etc. etc.), it is the lakhs of hardworking Indian labourers abroad who have so far saved us from a BoP default due to the yearly repatriation of their savings. The trade deficit of about $ 190 billion was reduced to (current account deficit) $ 88 billion due to the $ 100 billion flowing in from these workers abroad. When this $ 88 billion is the main cause for the present panic, imagine what the state of affairs would have been if repatriations dropped even by half—which may well happen, with the Arabs aggressively reducing their foreign labourers!

Be that as it may, let us look at the entire chakravyuh in which we are stuck:

India’s external debt has been rising sharply to reach about $ 400 billion. Of this external debt, the short-term component has increased sharply, servicing of which will absorb a staggering $ 169 billion of the country’s foreign exchange reserves in the next twelve months. This amount together with the CAD of $ 88 billion will virtually wipe out our foreign exchange reserves of $ 250 billion (not including gold). So, even without considering the huge outflow of FII funds, we are pushed to a BoP crisis where we have no foreign exchange reserves to pay for any future imports, foreign travel etc. Either the country has to beg the IMF or once again mortgage its gold stock as it did in 1991.

And now to this situation one can just picture the panic when FIIs (Foreign Institutional Investors) began heavily withdrawing their money from India’s debt and equity markets (mostly debt)—$ 11.3 billion in just the two months of June and July. This is the chakravyuh one is stuck in—create an economy dependant on foreign trade and investment, and then when dollars are drained out, we are stuck with an inability to either pay for imports or service the foreign debt. It is a catch-22 situation.

And to make matters worse, with the heavy withdrawal of dollars by the FIIs the rupee has been crashing in a manner never seen before. Having turned our currency into yet another speculative commodity, a systematic attack has been launched against it by the international speculators. The RBI and Finance Ministry are at their wits end, using desperate measures, but unable to control the fall. Of course, they could release their foreign exchange reserves to prop it up, but they dare not do that as their margins are thin and would have even less to settle the CAD and servicing on the external borrowings.

Prem Shankar Jha, in an article in The Hindu (August 10, 2013), explained the situation thus:

A foreign exchange crisis will now be far more damaging than the crisis in 1991. At that time industry was growing at 12.8 per cent. Today, industry’s growth rate has been below 1 per cent for 20 months. So, it has little resilience that it had in 1992. But what is giving Indian business nightmares is the foreign debt they have contracted since 2006-07. The outstanding amount is now $ 140 billion and the rupee’s fall is making this increasingly difficult to service and repay. The bulk of this is by about 100 large Indian firms. If a rising debt service burden (due to the rupee falling by over 30 per cent in two years) abroad forces them into insolvency, it will create a domestic liquidity crisis that will bring bank-lending to industry to a halt.

By March 31, 2013 itself, when the rupee had depreciated only six-to-seven per cent, the increase in debt had wiped out the entire net profits of companies like Adani, J.P. Associates, Reliance Com, Reliance Power, PSW Steel etc. Since then it has fallen by nearly 20 per cent. One can imagine the crisis these companies face.

For these embattled firms, the only way out will be to sell their prize assets. We will see in India a repeat of what happened in 1998 in South Korea, Thailand, Indonesia etc. where hedge funds made a killing, swallowing up assets at throwaway prices. We already see some companies going that way like Kingfisher, Suzlon, Jet Airways (the controversial Itihad deal) etc. In addition, in the first half of 2013, Private Equity (PE) funds have swallowed up $ 10 billion (Rs 59,000 crores) of Indian assets cheap. By the end of the last financial year (March 2013), the foreigners’ control of India’s top 500 companies exceeded that of their Indian promoter—the combined ownership of their shares in these companies was 29 per cent, to 28 per cent of the Indian promoter. As Prem Shankar Jha adds: “it is no surprise, therefore, that hedge funds abroad have begun to circle the Indian economy, sending the possibility of another ‘kill’.”

But, how was this state of affairs brought about? We see in the media (mainline) a surfeit of articles by ‘experts’, economists, commen-tators et al. but not a single one looks for the cause. They are conveniently silent on it. And all have a single formula solution: liberalise the economy more to attract greater flows of FIIs into the country. This is just what foreign powers are demanding. It would, in fact, mean capitulating to their blackmail—“either open-up, or we will pull-out more funds, destroying your rupee.” Though in the short term this would ease the pressure on the rupee, CAD and servicing the external debt, in the long term it would make the country even more vulnerable, and there would be no end to their demands.

In fact the US began its arms-twisting from last year itself. First, Standard and Poor and Moody’s threatened to reduce India’s investment rating to junk status unless it further ‘liberalised’ the economy. Prior to Secretary of State Kerry’s visit to India, 170 US Senators signed a letter launching a de facto trade war on India. Kerry himself focussed his visit only on issues of trade and investment giving India an ultimatum to buy the 10 nuclear reactors in the pipeline, worth billions of dollars. More recently four influential US Senators asked the US Inter-national Trade Commission to investigate India’s “unfair practices” in trade and FDI in agriculture, manufacture and service sectors. Finally, there was the media onslaught by the Bhagwati-Panagariya combine that sought to give this attack an academic halo.

Since last year, the government has been capitulating to these pressure tactics, raising caps on FDIs and FIIs and giving them more and more concessions. Minister after Minister began touring the West seeking investment by show-casing India’s ‘success’ story. In September last year itself the government passed a slew of ‘reforms’. This was followed by regular steps to further open up different sectors and increasing the cap from 26 per cent to 49 per cent—like in insurance, pension funds, retail etc. At a recent Cabinet meeting it was decided to open up even the highly sensitive defence sector to foreign capital. No doubt, the recent Cabinet decision to double gas prices to Ambani was not only to please this family and its 30 per cent partner, British Petroleum, but also to prove their commitment to reforms before the international community. It is also no wonder that India remained silent after Britain humiliated us by putting us on the danger list for visas, and was equally apologetic of US spying in India as the Snowden leaks revealed.

Yet, even after all this, the dollars were not forthcoming. The crisis has been deepening. This is partly due to international financial factors (the decision of the US Government to cut down on Quantitative Easing which had released huge funds into financial markets) and partly due to the US’ demand that we crawl even further—say, give them some more deals like that for 10 nuclear reactors, shift the deal for $ 10 billion worth of fighter aircraft from France to the US etc.

But, till now, as the money did not flow in, there was a panic with the rupee crashing further and further—customs duty was hiked on gold/silver to cut the import bill, and curbs put on the amount of foreign exchange one is allowed to take out. Also the RBI maintained high interest rates to squeeze liquidity, in order to control inflation.

All this had little impact. Gold sales continued to rise, due to people’s conception of a safe investment in an unstable economy. And with the rise in customs duty and capital controls the business community and West began to feel that India was going against reforms. One certainly does question the short-sightedness of the policy-makers. Why do they now act against their own-promoted policies only when the water has reached their nose and they are about to sink? Could they not see what was coming well in advance? With a host of economic ‘experts’ in every department could they not foresee what was coming? In fact the RBI Governor himself threw up his hands in helplessness saying: “the rupee depreciation over the last six weeks has been because of global factors... It is difficult to say how long that effect will persist because it is due to factors beyond our control.” This is open admission that we have handed over control of our economy to the West!! Now it’s for them to take a decision, whether to pump in money and stabilise the rupee, or withdraw even more and make it crash further. No doubt, they will take decisions depending on which option will give them greater returns—not certainly what is good for India!!

Meanwhile the Indian policy-makers are trying to prove that the former is the better option. SEBI is auctioning G-Sec bonds on a regular basis, the last being for a huge $ 10 billion. (August 19, 2013) With interest rates having jumped two per cent in one month on these bonds (over nine per cent—equivalent to a junk status by the rating agencies), they are hoping to attract the dollars back. Besides this, a slow of other measures have been taken to attract foreign capital. Even if foreign money does come in, it may ease the situation in the immediate sense, but it will worsen it in the long term.

But, before looking for real answers, let us briefly view the Sen-Panagariya debate for the answers/suggestions they provide.

Clash of Titans

Firstly, the entire debate in the media was regarding generalities, not specifically dealing with the concerete bottlenecks our system is facing. Secondly, though both are proponents of neo-liberal policies, there are shades of difference in their approach. Both agree that GDP growth rates reduce poverty and therefore accepted the lower poverty figures dished out, something which most in the country found unacceptable. No doubt by accepting these figures they were trying to prove that the high growth rates of the 2004-2011 period reduced poverty.

Bhagwati-Panagariya provoked this debate with Amartya Sen as part of the promotion of their new book India’s Tryst with Destiny. They seem to be stuck in the old groove of the Thatcher-Reagan era. Most reasonably honest economists have refined their views in the light of the 1998 crisis and more particularly the major crash of 2008—worst since the Great Depression—and the continued stagnation in economies centred around the two-year-old euro debt crisis. They also ignore the reality that the boom of their neo-liberal policies benefited merely the top one per cent of the populations, with a spill-over to a section of the middle classes. Never has the gap between the rich and poor been raised to such extreme levels as a result of their policies. Of course, the US policy-makers are still in this warp, and it is they who need such economists.

Panagariya, while in India, harped on their pet theories—GDP growth in itself reduces poverty, and the market should determine the economy and there should be minimum government intervention.

If we look at the world today, we do not see any relation between GDP growth and reduction in poverty. And as for government intervention, what about the huge bail-out of US banks and corporates in the 2008 crisis? What about the major tax concessions in India to big corporates, TNCs, foreign funds and trading in finance through the Mauritius route (PEs, Derivatives etc.) What about the PSU banks expending huge funds (now written off as bad debts) to bail out top 30 corporates (only now being investigated by the CBI)? What about 2G, Coalgate, and a host of other deals (including land) given for a song to the preferred corporates? Why does the P-B combine ignore all this and merely wake up when the government seeks to give subsidies that help the poor? Even the Economist magazine (June 29, 2013) had this to say: “It is a nice irony that the titans of fund management, who consider themselves robust champions of the free-market system, are so dependent on handouts from the monetary authorities.”

The P-B combine needs to show one country that runs successfully according to their model. The once much-promoted ‘tiger’ economies are all but forgotten after the 1998 crisis. On the other hand, we have examples of Venezuela and other countries which have moved away from the neo-liberal model doing much for their masses.

It is here that Sen somewhat differs, though he did once famously say at Seoul: “If globalisation hurts, have more globalisation!” Though within the same framework, there are shades of difference. So, for examples, in an inverview to The Indian Express (June 21, 2013) he said:

“India’s underperformance can be traced to a failure to learn from the examples of Asian economic development, in which rapid expansion of human capability is but a goal in itself and an integral part of achieving rapid growth. Japan pioneered that approach, starting after the Meiji Restoration in 1868 (which had implemented a thorough land reform) when it resolved to achieve a fully literate society within a few decades. Through investments in education and health care, Japan simultaneously enhanced living standards and labour productivity... The lesson of its development experience remained, despite the catastrophe of Japan’s war years... China, which during the Mao era made advances in land reforms and basic education and health care, embarked on market reforms in the 1980s; its huge success changed the shape of the world economy. India has paid inadequate attention to these lessons. The case for combating debilitating inequality is not only a matter of social justice. Unlike India, China did not miss the huge lesson of Asian economic development, about the economic returns that come from bettering human lives, especially at the bottom of the socio-economic pyramid... What India needs most is more knowledge and public discussion about the nature and huge extent of inequality and its damaging consequences, including for economis growth.”

One may not agree with Sen’s neo-liberal concepts, but what he says here makes far more sense than what the Bhagwati lot say. Such a study and debate will certainly be far more constructive in developing a more effective model for India’s economic development, rather than wasting time debating with outmoded theories, long past their usefulness. The neo-liberal theories were useful to pull the Western economies out of the deep stagflation of the 1970s and successive oil decades. But in so doing they unleashed the monster of finalisation of the economies.

The problem that the Indian economy faces is both immediate as also long term (structural), but what the government is involved in at present is mere fire-fighting.

So now let us see where one needs to tread to set correct not only the immediate dangers, but also put the country on a trajectory that will make sure that these do not recur, and that development is really and truly inclusive.

Towards Real Change

First I will try and deal with the immediate problems of BoP/CAD, rupee devaluation, and inflation—suggesting both some immediate solutions and long-term suggestions. Finally I will try and touch on some structural lacunae in the economy and the necessity for their change, if at all our country is to develop.

But before coming to these crucial issues a short note on the international economic scenario. Having pushed our country into the vortex of the world economy and bound it hand-and-foot to foreign finance and foreign trade, there is a necessity to briefly analyse its implications.

International Context

The irrationality of the global economy is such that when America was doing badly, India gained (hot money), and now when the US economy is said to revive, India is in panic. In such times to depend so heavily on the international world economy will be suicidal.

The very neo-liberal policies that evolved in the 1980s were a financial answer to the deep stagflation of the 1970s which witnessed two major oil-shocks. Financialisation is like a big balloon filled with hot air, it is big in appearance, but its essence is fragile, as it grows not on the basis of manufacturing but by a gigantic circulation of funds, mostly speculative. This earns vast sums to a small elite, as also to a section of the middle class and politicians who service it, creating the elite consumer market. This balloon must necessarily burst. The bubble first burst in Japan in 1989 and was followed by nearly two decades of economic contraction. Then, the 1998 crisis witnessed the ‘tiger’ economies becoming toothless and the rouble collapse. The year 2001 saw the US economy going into recession. And then came the major collapse in 2008—a veritable second Great Depression—followed by continuing stagnation in the US and elsewhere. In 2010-11 came the euro-debt crisis and recession of their economies coupled with high levels of unemployment.

Following the 2008 crisis the US Fed resorted to bond-buying, releasing vast sums into the market. With this the interest rates on US Government securities fell drastically and have been near zero. The low interest rates were necessary to boost consumer spending and catalyse a recovery. Simultaneously the vast funds released were not invested in the US where interest rates were near zero, but sought out lucrative financial markets like India. With the Indian Government opening the door wide with huge (often tax-free) concessions for foreign funds, FIIs de facto took control of most financial markets in India—stock exchanges, commodity markets (derivative trading)—manipulating these to give windfall profits. It also invested in the Indian debt market (bonds) which gave relati-vely higher interest. With the rupee made convertible on current account, and even capital controls reduced, foreign funds ran amuck in our country.

Now, with the huge profits extracted from countries like India and consumer spending revived due to low interest rates there, together with high levels of exports, there is a temporary recovery in the US and a collapse in India. The flood of imports have impacted manufacturing in India, foreign capital have extracted huge amounts of wealth from the country impacting savings and investment; and the cheap Indian labour abroad (whether semi-skilled in the Arab countries or skilled IT in the West) have added to the profits primarily of the TNCs worldwide. Any further opening up of the economy may temporarily stabilise the rupee bringing some relief to the 30-40 big corporates that have borrowed heavily abroad, but it will make the country and economy vulnerable in the long run.

Unfortunately this is the single policy programme put forward by the economists, government and all who matter—give more concessions to attract foreign capital, avoid any form of control as that destroys ‘investor’ (read foreign investor) confidence, and reduce the fiscal deficit by cutting subsidies to the poor and middle classes.

But, if this is not the solution, what is? Alternative solutions have been put forward, though somewhat partially, by many Left economists (Frontier, EPW etc.). Now to elaborate on these a bit further: first I shall touch on the immediate problem of BoP, rupee devaluation, inflation, and then view some structural problems that need to be set right.

BoP Crisis and CAD

India has been allowing the trade deficit to soar due to a quantum leap in imports, facilitated by reducing customs duties radically. Then this spiralling deficit is sought to be balanced by large inflows on capital account. This itself is bad economics, as it is like an individual resorting to bank borrowing to finance his daily needs!

The vicious circle we are being pushed into has been presented well by Ajit Ghose (EPW, August 24, 2013) thus:

The current focus of government policy on attracting larger inflows of foreign capital to finance the current account deficit is based on presuppositions and judgements that can be called misguided. The policy strengthens the probability of the emergence of a vicious circle of ever larger capital inflows financing ever larger current account deficits till an external shock or a confidence crisis brings about sudden stops and outflows and thus economic collapse.

Because of the ‘reforms’ policies, the Current Account Deficit (CAD) has leapt from a mere 1.5 per cent of the GDP in 2007-08 to a huge five per cent of the GDP in the last financial year. As long as capital inflows balanced this our policy-makers lived in the illusion that all was well. Though aware of the 1998 hot money phenomena, no steps are being taken to protect the country from financial attacks. After reducing customs duties on all and sundry items, in a knee-jerk reaction, they suddenly raised it on gold and silver; and after allowing a free flow of foreign capital they have now put some minor curbs. Though these had little effect, it resulted in an uproar from the financial world and big business, fearful that their policies of economic reforms were now being reversed. Even such minor steps were not tolerated, and they threatened to pull out more funds. Panic-stricken, the government assured them that these measures would be withdrawn, and after a high-level meeting, the government said they would soon announce a series of big ‘reforms’.

But, as Rohit in the EPW, says (August 3, 2013): “Instead of a clamour for more reforms in the financial sector and the capital account, which would make both the inflow and outflow of hot money easier and aggravate the problem, there should be restrant on this count.”

The following are some suggestions to solve the BoP/CAD problems:


• Raise customs duties on all luxury items to the pre-1990 level.

• Impose capital controls on both inflows and outflows.

• Impose greater taxes on all forms of speculative trading; scrap the double taxation treaty with Mauritius.

• Bring back the vast sums of illegal money stashed away abroad. This will act as a buffer in case international capital seeks to blackmail the country by withdrawing its money.

• Bring back the $10 billion given to prop up the euro, as also any other funds loaned to other countries.

• Reverse the cut in oil purchases from Iran at US behest, and save billions in foreign exchange, as the purchases are in rupees.

Long Term:

• Make the growth story depend on the indigenous market by raising the people’s purchasing power, rather than depend on foreign trade.

• Move towards self-reliance on energy needs rather than depend so heavily on imports. Invest large sums in wind and solar power (as the US, EU, Japan, China are doing) rather than the capital intensive imports of nuclear reactors.

• To raise larger amounts of money for invest-ment purposes, make savings schemes more lucrative so that people put their savings into financial instruments instead of gold.

Protection of the Rupee

The rupee, which was Rs 44 to the dollar in June 2011, fell to Rs 60 to the dollar by end August 2013—a staggering fall of 59 per cent. It is today one of the weakest currencies in the world. The depreciation of the rupee is most worrying for some big corporates, who will have to shell out over Rs 3 lakh crores extra on their external borrowings. This would drive most of these companies to insolvency.

The falling rupee is also pushing up inflation, increasing the import bill (and so the CAD) and thereby worsening the BoP. Whatever concessions India’s rulers may give to foreign flows, those may bring immediate relief, but in the long run will increase the vulnerability and danger of an even bigger collapse. Given the volatility in the world economy, the West will seek maximum returns from countries like India to prop up their declining economies. So, much worse can be expected in the future. Instead of giving in to their arms-twisting the following additional steps could be taken besides those already mentioned for the CAD.


• If private corporates cannot repay allow them to go bankrupt and do not bail them out with taxpayers’ money.

• Ban investments abroad and put a mortaroium on the TNCs and expatriates working in India from taking funds abroad.

• Disband the Commodity Exchange Board which is nothing but a centre for speculation and black money. Put severe restrictions on all other methods of speculation like P-Notes etc.

Long Term:

• Stop speculation on the rupee.

• Reverse the policy that made the rupee convertible on current account and all the steps taken towards capital account convertibility.

Reduction of Inflation

The RBI’s monetary intervention to curb inflation is praiseworthy, though it is facing much opposition from the growth fundamentalists. By maintaining high interest rates and squeezing liquidity the RBI hopes to control inflation, even at the cost of growth.

Unfortunately this has had limited success for two reasons. First, the government policy is a major cause for inflation as it is itself increasing prices of petrol, diesel, gas, electricity, fertilisers etc. etc. Second, there is a massive hike in the prices of food items basically due to hoarding and trading in futures. Over and above all this, the control of liquidity through monetary policies is difficult in a country like India where the black economy is said to be 40 per cent of the GDP. This money will continue to float around no matter what stringent measures the RBI takes.

The problem is not only inflation, it is also the declining earnings of the masses (except for the elite, black marketeers, and a section of the middle classes). Inflation is one aspect of the decline in real income. What is required is to put the country on a true growth strategy by increasing the purchasing power of the masses (and not just the elite). This entails raising incomes, plus controlling inflation.

The following are some steps to raise the purchasing power:

• Continue the liquidity restricting policy of the RBI and to make it more effective, bring the black economy under control.

• Reduce prices and increase subsidies of all basic items—food, fertilisers, medicines, petrol/diesel/gas, electricity etc. Funds for this can be mobilised by cutting subsidies to big corporates, increasing taxes on speculative incomes and the super rich, and tapping the vast black economy.

• Increase public expenditure on health (one of the lowest in the world) and hygiene, as illness saps up vast amounts of the family’s earnings and even savings.

• Raise interest rates on savings to well above the inflation rate—on bank deposits, Pension Funds, Provident Funds, Post Office Savings etc. Since the last five years bank deposit interest rates have in fact fallen below the inflation rate!!

There could be many more steps, but these are some immediate ones which, as Amartya Sen says, would be fundamental not only as a social need but a sound economic necessity.

This now brings us to some structural questions that need serious consideration.

Structural Considerations

Imagine a mere 12 per cent of our GDP from agriculture has to support 60 per cent our population—that is, 70-crore people; while a 7.5 per cent GDP contribution from the IT sector (IT-enabled services, BPO, hardware production) supports a mere 28 lakh population. How can such a gigantic gap be economically sustainable and a viable formula for growth? Besides this, we find that the manufacturing sector, which is the motor for growth of any economy, is stag-nating, since the last decade, at a mere 26 per cent of the GDP.

It must not be forgotten that the high growth rates reported since 2004 till last year were primarily due to the real estate and financial services sectors. And now the service sector comprises over 60 per cent of the GDP. But, this sector does not generate significant employment, particularly for the vast numbers displaced from agriculture.

As Amartya Sen mentioned, land reforms was an important basis for China’s growth, as it was for Japan during the Meiji Restoration. But in India we see deep stagnation where the bulk of the households eke out a bare existence on small and marginal farms whose numbers have nearly tripled over the past three decades from about five crore households in 1970-71 to 11.7 crore households in 2010-11. And, together with this, if we consider the large agricultural labour population, we find a vast mass stuck in the quicksand of decay.

Even the two crore-odd middle farmer house-holds eke out a hand-to-mouth existence, squeezed by the traders on the one hand, and the continually rising cost of inputs (fertilisers, pesticides, diesel etc.) on the other. The bulk of these farms are unviable in the present structure.

And with manufacturing stagnating, the bulk of the population displaced from agriculture ends up as a sub-human floating mass in the slums of urban India.

How can such an economy be viable with only a middle class (that too is now being squeezed by job losses, inflation and low savings) acting as a market for growth, and of course those with stacks of black money, as we see even in the jail?

The neo-liberal model has proved a failure, not only in India, but at its very heart in the US and Europe. Many a country have begun shifting away from this model, and are doing much better for themselves. India should think instead of blindly aping the West.

For this the economy must shift in the direction of a more balanced equilibrium between the GDP contribution and the population surviving on it.

After many policy changes and desperate attempts having failed to cure any of the three major problems—BoP/CAD, rupee fall and inflation—the policy-makers are back to their old mantra: promote growth in order to revive investor confidence. So they attack the liquidity restricting measures of the RBI and are preparing to throw all environmental and tribal concerns into the dustbin, to push ‘infrastruc-tural’ and mining projects as also open up further to foreign capital. This, they believe, will develop investor confidence and foreign funds will once again flow in and save the situation.

But, there is not a word on the above men-tioned structural incongruities that exist in the economy. In fact it is not even mentioned in their Economic Reviews, Planning Commission reports etc. But, solving this will be fundamental to setting India on the path of real growth.

Meanwhile, the rupee continues to fall, now crossing the Rs 66 barrier, crashing 188 paise in a single day! The largest single fall in Indian history. And within a day it fell another 64 paise to reach Rs 69 to the dollar!! But which political formstion is really concerned with the seriousness of what is going on?

Most, except the Left, only blame the Congress but put forward no alternative in our economy. Will they only wake up when there is a run on our banks with many collapsing, when inflation goes completely out of control, when the rupee lies in total shambles, when company after company goes bankrupt and lakhs are thrown out of jobs? This nightmarish scenario is not a figment of one’s imagination, it is a strong possibility as we have seen many a country reach this situation, that is, countries which have followed this path. The most recent were Greece and Cyprus, earlier Argentina and some other Latin American countries, and even Turkey was hit by a similar situation; not to mention the numerous East European countries and even Russia during the Yeltsin era. In these countries, during such periods, the poverty-stricken died like fleas and even large sections of the middle class were pauperised with their savings reduced to nothing due to runaway inflation. Most of these countries had a recovery only when they were able to take politically bold decisions cutting themselves off from the American apron-strings and their ultra-neo-liberal economics.

India needs to take lessons from this past international experience; otherwise we are all set to go in the same direction.

  Meanwhile, volatility increases with war shadows over the Middle East. Crude oil values have already risen to $ 117 a barrel—predicted to rise to $ 150 a barrel if war breaks out. Imagine its impact on our CAD!

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