The Bull in A China Shop Wrecks Indian Economy
The BJP government, like a bull in a China shop, is wrecking the
A neo-liberal regime, even at the best of times, i.e. even when the economy is
booming, brings misery to the vast mass of the working people by imposing upon
the petty production sector a process of primitive accumulation of capital,
through a withdrawal of State support from it and through leaving it to the
mercy of the "spontaneous" working of untrammelled capitalism.
When the economy slows down, with the inevitable collapse of booms which are
typically sustained in such a regime by asset-price bubbles, the misery of the
working people only gets compounded.
The BJP government however, not content with such a process of "spontaneous" neo-liberal immiserization, has decided to unleash its own additional
initiatives in the same direction.
If demonetization dealt an entirely unwarranted additional blow against the
petty production sector, whose consequences alas were utterly predictable, the
introduction of the Goods and Services Tax, which is a completely
anti-Constitutional measure to boot, as it takes away the Constitutional rights
of the state governments, has only accentuated the process. As a result, we are
witnessing today a rare co-occurrence of three phenomena: a stagnation of the
economy, a revival of inflation, and a yawning current account deficit on the
balance of payments.
The first of these, namely the looming recession, which is itself the product
of three factors, viz. the world crisis being imported into the domestic
economy, the demonetization whose effects continue to linger, and the GST which
has suddenly readjusted tax-burdens in a manner detrimental to small producers
and traders, has already been discussed by me in an earlier article in the
pages of this journal.
The revival of inflation, and that too at a time when world oil prices
continue to remain subdued, is again a result inter alia of the new tax regime.
This new regime has had a direct effect on inflation arising from an increase
in the tax incidence on necessities.
This is because the government's effort to achieve "revenue neutrality",
i.e. no loss of revenue through the shift to GST, despite having just a few
(common) rates across commodities, takes the form of increasing the rates on
necessities which have an inelastic demand (and therefore fetch larger tax
revenues) while lowering rates on luxuries which have an elastic demand; but
the latter whose prices come down as a result have a lower weight in the
Consumer Price Index compared to the former (apart from not being the sort of
goods the common people consume), so that this adjustment pushes up the
But the new regime has additionally an indirect effect as well upon inflation:
since revenue neutrality is not actually being achieved under the GST regime,
and the total revenue is actually declining instead, to shore up its revenue the
government is resorting to indirect tax-hikes on petro-products (which are
outside the ambit of GST); and these are being "passed on" to the consumers
through higher inflation.
It is however the last of the three above-mentioned phenomena, namely
the sharp widening of the current account deficit of the balance of payments,
which needs to be discussed at some length.
On Friday September 15, the Reserve Bank of India came out with the figures for
the current account deficit for the April-June quarter of 2017, which showed
this deficit to be $ 14.3 billion, or 2.4 percent of the quarterly GDP. This is
a huge jump from earlier: the corresponding figure for the April-June quarter
of 2016 was a mere 0.1 percent of GDP, and for the preceding quarter itself, i.e.
January-March 2017, 0.6 percent of the GDP. In fact the first quarter current
account deficit is almost equal in absolute value terms to the deficit for the
entire financial year 2016-17, which was $15 billion.
This enormous jump in the current account deficit did not of course pose
any immediate problem with regard to its financing. There was a jump in the
inflow of Foreign Direct Investment and, even more pronouncedly, of Foreign
Portfolio Investment, because of which not only was this deficit easily
financed, but India even added $ 11.4 billion to its foreign exchange reserves
in this quarter, taking the total of such reserves to over $ 400 billion. But
the point to ask is: what does this widening deficit portend for the future?
Most analysts have pointed to two factors as being largely responsible
for the jump in the current account deficit. These are: a rise in gold imports
in anticipation of the shift to a GST regime which was to occur on July 1; and
a drag on exports arising from the uncertainties associated with this shift to
GST. They have therefore implicitly underscored the culpability of the BJP
government for the widening of the deficit but have suggested that this
widening is only a passing phenomenon.
It appears however that the upsurge in gold imports has not abated in
the subsequent period after the introduction of the GST. In fact the
merchandize trade deficit, which, at a whopping $41.2 billion in the April-June
quarter, was the main reason for the widening of the current account deficit,
continues to remain wide even in the current quarter; and continuing
large-scale gold imports are certainly contributing to it.
The merchandise deficit for the month of August for instance is estimated to be
$11.6 billion; at this rate the merchandise deficit for the second quarter too
would amount to about $35 billion.
Indeed the total current account deficit for the financial year 2017-18
is likely, according to estimates by various agencies, to be anywhere between
$30 to $40 billion, as compared to just $ 15 billion for 2016-17. The yawning
deficit that we find in the first quarter in short is not a mere temporary
aberration, but a phenomenon that will characterize at least the current
financial year as a whole.
There are two additional factors to consider here. One is the gradual
pick-up in world oil prices, which, even though these prices may continue to
remain modest in view of the ongoing world capitalist crisis, will certainly
worsen India's merchandise deficit, and with it the current account deficit.
The second factor is monetary policy in the U.S. It is generally
expected that the Federal Reserve will raise interest rates in the U.S.,
despite the fact that recovery from the crisis still eludes that economy,
because of rentier pressure. Since other advanced capitalist countries too had
lowered their interest rates dramatically to zero or near-zero levels in tandem
with the U.S., they too would now raise their rates if the U.S. does; the era
of cheap money in short is coming to an end.
And once this happens, which may be quite soon, India will find it
difficult to finance its current account deficit. Indeed this fact itself can
stimulate a flight of capital from India, as had happened in 2013, which even
the large reserves that we currently have will not suffice to stem. (In fact
since such reserves could disappear overnight if the government made a futile
bid to stem the flight, it may not even dare to use them at all for stemming
such a flight).
The conventional view in such a situation is that a depreciation of the
currency that would ensue would automatically close the current account
deficit, so that if only some temporary finance is arranged through the IMF or
other financial institutions to tide over the transitional difficulties, then the
economy would overcome the crisis.
But this view is palpably wrong for three reasons: first, in a situation of
world crisis and shrinking world demand, an exchange rate depreciation, while
it may prevent any further worsening of the current deficit, is unlikely to
reduce this deficit itself.
Second, an exchange rate depreciation will increase the domestic inflation
rate, which, apart from its adverse impact on the poor, will also give rise to
expectations of a further exchange rate depreciation (because domestic costs of
production would rise as a consequence), and thereby trap the economy in a
spiral of inflation and exchange rate depreciation.
And third, several Indian firms are now in a situation where they have
borrowed in foreign exchange in the international market. Any fall in the price
of the rupee will damage their balance sheets, since their liabilities which
are in foreign exchange will increase in value compared to their assets. This
would jeopardize their solvency and again cause a spiral of exchange rate
depreciation-cum inflation, apart from accentuating the recession.
This incidentally is exactly what happened during the East Asian crisis
twenty years ago: in South Korea for instance several firms (and banks) had
borrowed in foreign exchange to invest domestically and a run on the currency
had damaged their solvency.
The question therefore is not whether India's current account deficit
will eventually come down or not, when the dust has settled on the introduction
of the GST. The real question is: will the era of cheap money in the U.S. and
elsewhere come to an end before India's current account deficit has closed
somewhat. Even if India's current account deficit closes, an increase in the
U.S. rates would still cause a capital flight from countries like India which
will put them into great difficulty. But if this happens when India's current
account deficit itself is extremely wide, then the problem becomes that much
When such a fate overtakes a country, the only policy a government can
adopt under a neo-liberal dispensation, is a combination of extreme "austerity" and "de-nationalization" in the sense of handing over domestic assets to
foreign capital in order to entice it not to leave the country's shores, but
rather to come into the country to keep its economy afloat. Such "denationalization" again is what happened in East Asia, and this alas is the
kind of fate that awaits us when the Fed raises the rates in the U.S.
The Modi government however, as the proverbial bull in the china shop, is
totally oblivious not only of the world economic situation, but even of the
consequences of its own actions. And perhaps it does not even care if Indian
assets pass into foreign hands. This is to be expected: the political formation
to which PM Modi belongs that did not lift a finger for the freedom of this
country from colonial rule, is hardly likely to get much exercised over such "denationalization".
Ironically however they are the ones who call everyone else "anti-national".