 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)

Recessio n Adv. countries Return of the postponed?

2008 Financial Crisis

Financializatio n 1970-2007 SubPrime Housing Bubble Debt bubble Revers e Capital Flows

The Long Downturn 1970s 

Stock Market Bubble Emer ging Mkts bubb le

2008: A Historical Turning Point
The Financial and the Real  Financialization postpones long downturn effects on Decelerating 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 AS 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 Rest
Immediate 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 deficits Decrease in hot money potentially good Recession does curtail Western Markets of even less liberalized

economies 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 formative Growth inevitably largely endogenous (derided as ‘trade pessimism’, autarky, inward-looking, ‘socialism’) Growth pattern of high Inequality + Poverty Since mid-1980s enthusiasm for Neo-liberalism, ‘globalization’ and the US among educated opinion But 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 spending  Reserve Bank of India (RBI)’s conservative: no hyperinflation  RBI not formally independent but respected (until recent Min Fin electorally 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 Development
 Nationalists opposed Drain, Deindustrialization, Colonial not

a national state  Planned National Development includes bourgeoisie (Bombay Plan etc.)  Import Substitution Industrialisation (ISI) + Agrarian Transition

 Egalitarian agrarian reforms = Higher productivity, surpluses,

market  Planned industrial development = Large Pub sector + diversified industrial structure + self-reliance

 Quasi Marxist strategy undermined by agrarian power  Crisis of planning in Late 1960s = Green Revolution  Achievements: derided but actually

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

‘Fetters’ and Planning
Corresponding to each state of development, there

tends to grow a certain economic and social stratification which is conducive to the conservation of gains from the use of known techniques. Such stratification has a part to play in social progress. But beyond a point, it hampers innovation and change, and its very strength becomes a source of weakness. For development to proceed further, a readaptation of social institutions and social relationships thus becomes necessary … The problem, therefore, is not only of merely rechanneling economic activity within the existing framework; that framework itself had to be remodelled. p. 7.

The Hindu Rate of Growth in Historical Perspective

1969-84 Under-cover Liberalization
Prima 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 set pattern Agrarian bourgeoisie  Urban and industrial investment  provincial propertied class  seamless Indian capitalist class

1984-92 Domestic Liberalization
From late 1970s onwards hesitant but then

accelerating decontrol: various reports (Desai, 1969, Jha, 1981) critical of state intervention 1984 Rajiv Gandhi domestic liberalization with limited international opening Accompanied by usual rhetoric about free market and export-led growth; though exports remain stagnant Growth rate picks up circa 1980 not after 1991, as neoliberals have it Consumer durables-led boom (mainly vehicles) Energy/import intensity real cause of Balance of Payments crisis

Cargo Cult? Exports 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 sector  Growth 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 increases  Mainly driven by pent-up demand for goods with high import content  Narrow domestic market easily saturated: industrial recession by 2001.  Capital Controls remain:  RBI’s conservatism prevails over Ministry of Finance enthusiasm  India escapes 1998 Asian meltdown  Continuing caution about portfolio investments and reserve accumulation

India’s Public Sector Crown Jewels
Bharat Heavy Electricals Ltd  Bharat Electronics Ltd Coal India Ltd  Bharat Petroleum Corporation Ltd  GAIL (India) Ltd Hindustan Aeronautics Ltd Indian Oil Corporation Ltd  Hindustan Petroleum Corp Ltd National Aluminium Co Ltd  MTNL NTPC Limited  NMDC Limited Power Finance Corp Ltd  Oil & Natural Gas Corp Ltd  Power Grid Corp of India Ltd Rural Electrification Corp Ltd Steel Authority of India Limited  Shipping Corporation of India Ltd

Wire Transfer

2002-07 Credit Fuelled Industrial Boom
 Govt 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 sectors  Slowdown evident since 2006

India’s own credit-feueled boom

Financial Crisis Transmission Mechanisms
 Portfolio Investments and Withdrawals by IFIs
 Fall in Sensex  Depreciation of rupee

 Exposure of Indian banks to toxic assets:

increased operations).  Exposure of non-bank FIs and corporates to domestic stock and currency markets.  Expected to be large, RBI permits banks to provide loans to mutual funds against certificates of deposit (CDs) or buy-back their own CDs before maturity.  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 on growth could be high.

 RBI estimate 450m (90m public + 360 pvt)  + depositors and investors in foreign banks operating in India (recently

Easy Come (US$ m)

Easy Go (US$ m)

Sensex: Halved by Crisis

Rupee Value

1/12/200 8 50.1

Recession: Transmission
Effect on trade with US, EU and developed

countries: already China and UAE/Saudi Arabia 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 US compensated by Gulf countries (?) Hit to outsourcing(?)

Oil Hit

India at Crossroads?
 Overall, growth slowdown of Indian making  Effects of crisis/recession only compound it  Potential return of ForEx constraints unless reorientation  No 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 week

 In short, will it introduce a new age of Reforms, in the sense the

word conveyed before neoliberalism?

Sources and Acknowledgements
Indian progressive economists  See esp. www.macroscan.org  www.networkideas.org Reserve Bank of India data and analysis at

www.rbi.org.in World Bank/IMF My analysis of the dynamics of India’s political economy since 1947 to appear as
 The Making of the Indian Capitalist Class

 Thanks for support in writing to Zentrum Moderner

Orient, Berlin

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