India in the Financial Crisis

8/8/2019 India in the Financial Crisis

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Outline The popular questions The 2008 Crisis: causes and triggers Effects on the Third World Generally Distinctiveness of the Indian experience India: A potted history of the Indian economy

1947-69 Planned Development and its Abandonment 1969-1984: Liberalization by Stealth 1984-1991: Domestic liberalization 1991-2001: Global Opening? 2001 to present: Mini Credit Fuelled Industrial Boom

The Present Financial Crisis: Financial Transmission Mechanisms for India Recession Transmission to India

A Turning Point in Indian Economic History too? Sources and Acknowledgements



Inquiring Minds want to

know...Decoupling or Contagion (Financial and/or Real)? Growth slowdown?

Protectionism versus Globalization?

End of growth-producing ‘Reforms’?

Fate of Outsourcing?

Inflation?

End of Indian M&As?

Assumptions: Neoliberal policies fuel recent ‘tiger’ like growth

‘Strong Fundamentals’ and the Impending Elections (May 2009)



Recession

Adv.countries

2008

FinancialCrisis

Financialization1970-2007

Debtbubble

ReverseCapitalFlows

StockMarketBubble

Sub-PrimeHousingBubble

The LongDownturn1970s

Return of thepostponed?

EmergingMktsbubb

le



2008: A Historical

Turning Point The Financial and the Real

Financialization postpones long downturn effects onDecelerating First World Economies thro increased capital

inflows creating ‘Anglo-Saxon capitalism’Increasing state role thro neoliberal-ization of

(predominantly financial) markets

Declining US hegemony through growth competition thro A-S model with IW and growth repression in IIW and IIIE

End of all three as focus shifts to production, state and‘Rise of the Rest’



2008’s effects on the

RestImmediate loss of trade and finance

But long run gains in policy options, new terms of trade?

Financial contagion greatest in most liberalized markets

Least liberalised most successful = demonstration effect

‘Rise of rest’ not merely artifact of US deficitsDecrease in hot money potentially good

Recession does curtail Western Markets of even less liberalizedeconomies

Need to

Focus on internal and/or southern markets

Re-coup capabilities for economic governance



The Indian Experience...Big Bourgeoisie at Independence (not Kalecki-an‘intermediate regime’)Significant 1st stage ISI in 1930s

Economic Nationalism formativeGrowth inevitably largely endogenous (derided as‘trade pessimism’, autarky, inward-looking,‘socialism’)Growth pattern of high Inequality + PovertySince mid-1980s enthusiasm for Neo-liberalism,

‘globalization’ and the US among educated opinionBut 2 major steps up in growth (circa 1950 and 1980)

do not coincide with freer markets of ‘globalization’





... The Indian Experience.IMF/WB involvement absolutely large , proportionally insignificant

Internal pressures for economic liberalization (my date 1969)

Until recently state leads growth: first, direct state investment, later

demand boost through state salaries and spendingReserve Bank of India (RBI)’s conservative: no hyperinflation

RBI not formally independent but respected (until recent Min Finelectorally motivated takeover of liquidity injection oversight from RBI)

Nationalization of major banks 1969.

Capital Controls slowly and incompletely lifted

Foreign Financial Institutions’ presence limited



Sectoral GFCF at Current

Prices 1980-2007 (Rs Crore)



1947-69

Planned DevelopmentNationalists opposed Drain, Deindustrialization, Colonial not

a national statePlanned National Development includes bourgeoisie

(Bombay Plan etc.)

Import Substitution Industrialisation (ISI) + Agrarian TransitionEgalitarian agrarian reforms = Higher productivity, surpluses,

marketPlanned industrial development = Large Pub sector + diversified

industrial structure + self-reliance

Quasi Marxist strategy undermined by agrarian powerCrisis of planning in Late 1960s = Green RevolutionAchievements: derided but actually

higher ‘Hindu’ rate of growth; diversified industrial structure,institutional development



‘Fetters’ and PlanningCorresponding to each state of development, theretends to grow a certain economic and socialstratification which is conducive to the conservationof gains from the use of known techniques. Such

stratification has a part to play in social progress.But beyond a point, it hampers innovation andchange, and its very strength becomes a source of weakness. For development to proceed further, a re-adaptation of social institutions and socialrelationships thus becomes necessary … Theproblem, therefore, is not only of merelyrechanneling economic activity within the existingframework; that framework itself had to beremodelled.p. 7.



The Hindu Rate of Growth in

Historical Perspective



1969-84

Under-cover LiberalizationPrima facie increase in statism: nationalization of

Banks, industrial control increased, substantial 2nd state ISI, anti-smuggling, FERA, MRTP, etc.Underlying trend point elsewhere:labour repression,Green and White Revolutions,state intervention pro-capitalist by default

Inflation + middle-class political unrest + emergency+ 1977 Janata Government

Self-constraining inequitous growth process setpatternAgrarian bourgeoisie Urban and industrial

investment provincial propertied class seamlessIndian capitalist class



1984-92

Domestic LiberalizationFrom late 1970s onwards hesitant but then

accelerating decontrol: various reports (Desai,1969, Jha, 1981) critical of state intervention1984 Rajiv Gandhi domestic liberalization with

limited international openingAccompanied by usual rhetoric about free market

and export-led growth; though exports remainstagnantGrowth rate picks up circa 1980 not after 1991, as

neoliberals have itConsumer durables-led boom (mainly vehicles)Energy/import intensity real cause of Balance of

Payments crisis



argo uExports and Imports as

%GDP



Growth and the Neoliberal

Story



1991-01

Global Opening?Structural Adjustment (but like 1981 IMF loan, paid back early)Privatization of parts of very large public sectorGrowth and industrial growth accelerate, however,Despite Neoliberal and export led-rhetoric, exports rise only in traditional

categories: textiles, gems and jewellery, leather etc.

Balance of Payments gap closed by remittances Import penetration increasesMainly driven by pent-up demand for goods with high import contentNarrow domestic market easily saturated: industrial recession by 2001.Capital Controls remain:RBI’s conservatism prevails over Ministry of Finance enthusiasm India escapes 1998 Asian meltdownContinuing caution about portfolio investments and reserve accumulation



India’s Public Sector

Crown JewelsBharat Electronics Ltd Bharat Heavy Electricals Ltd

Bharat Petroleum Corporation Ltd Coal India Ltd

GAIL (India) Ltd Hindustan Aeronautics Ltd

Hindustan Petroleum Corp Ltd Indian Oil Corporation Ltd

MTNL National Aluminium Co LtdNMDC Limited NTPC Limited

Oil & Natural Gas Corp Ltd Power Finance Corp Ltd

Power Grid Corp of India Ltd Rural Electrification Corp Ltd

Shipping Corporation of India Ltd Steel Authority of India Limited



Wire Transfer



-Credit Fuelled Industrial

BoomGovt capacity for stimulus lower ; Fuelled by easy consumption credit

Increase in retail banking

Inflow of foreign loans + portfolio inv. + foreign financial institutions

Seemingly lifts historically heavy Foreign Exchange constraint

India’s reserves in August 2008 $310 bn, third in world

But accompanied by trade deficit (unlike China and Japan)But Trade Deficit > software + remittances current account deficit

Covered only by capital movements

M&As abroad rise, investment income rising but also outflows

Deficit on business services

But India begins exporting higher value added products: Chemicals,engineering goods and pharma.

Growth concentrated in some sectorsSlowdown evident since 2006



India’s own credit-feueled

boom



Financial Crisis

Transmission Mechanisms Portfolio Investments and Withdrawals by IFIsFall in SensexDepreciation of rupee

Exposure of Indian banks to toxic assets:RBI estimate 450m (90m public + 360 pvt)

+ depositors and investors in foreign banks operating in India (recentlyincreased operations).

Exposure of non-bank FIs and corporates to domestic stock and currencymarkets.Expected to be large, RBI permits banks to provide loans to mutual funds

against certificates of deposit (CDs) or buy-back their own CDs beforematurity.

Cutbacks on credit to individuals by banks. Marked deterioration in growth of all consumer loans. Given reliance of growth on this sort of credit, impact ongrowth could be high.



Easy Come (US$ m)





Sensex: Halved by Crisis



Rupee Value

1/12/2008

50.1



Recession: TransmissionEffect on trade with US, EU and developed

countries: already China and UAE/SaudiArabia biggest trading partners

Effect of rising dollar on B of P

Commodity Price inflation (?)

Growth slowdown to 7.8% (IMF projection)

Reduction in remittances from UScompensated by Gulf countries (?)

Hit to outsourcing(?)



Oil Hit



India at Crossroads?Overall, growth slowdown of Indian makingEffects of crisis/recession only compound itPotential return of ForEx constraints unless reorientationNo Decoupling without coupling (globalization rhetoric

notwithstanding)Real questions:Will India accept expansion of home market as the new

imperative? Address inequality and poverty?Will its opinion makers give up their destructive worship of the

market and the US?Will it address the cultural – religious, caste and gender

dimensions of inequality? Re: esp. Mumbai attacks last weekIn short, will it introduce a new age of Reforms, in the sense the

word conveyed before neoliberalism?



Sources and

AcknowledgementsIndian progressive economists

See esp. www.macroscan.org

www.networkideas.org

Reserve Bank of India data and analysis atwww.rbi.org.in

World Bank/IMF

My analysis of the dynamics of India’s political

economy since 1947 to appear asThe Making of the Indian Capitalist Class

Thanks for support in writing to Zentrum ModernerOrient, Berlin

http://www.macroscan.org/

http://www.networkideas.org/

http://www.rbi.org.in/

http://www.rbi.org.in/

http://www.networkideas.org/

http://www.macroscan.org/

Documents

India in the Financial Crisis