Is the World Capitalist Crisis Over?

Prabhat Patnaik

AN impression has got around in this country that the world capitalist crisis is over. It is no longer front page news in newspapers. One scarcely hears a word about it on television. And now that the Sensex has crossed the 15,000 mark, up from 9000 to which it had plunged a few months ago, everything appears fine to the Indian elite, which has wasted no time in spreading the cheerful news around. To be sure, the Indian elite is not alone in having this perception. An air of cautious optimism pervades even the elites in advanced countries which have been the hardest-hit by the crisis. They are more cautious, but optimistic nonetheless.

Much of this optimism springs from the behaviour of some financial indicators, notably the stock markets, whose impact on the real economy, though existent, can be tenuous. On the real economy itself, the most optimistic position is that we may be nearing the bottom of the crisis, that things are unlikely to get worse, which is very different of course from saying that things are back to “normal”. Thus British prime minister Gordon Brown has taken solace from the fact that though unemployment in Britain is rising, the increase in unemployment across periods is coming down. Much the same was being said about the United States until the month of June; but the increase in unemployment in June was much higher than in May which put paid to even these hopes. Even on current figures therefore we cannot say we are at the end of the decline.

THREE NEGATIVE

FACTORS

There are three factors moreover, each relating to the United states (whose level of economic activity matters the most for the world economy), though similar phenomena may be occurring elsewhere as well, which militate against the downturn itself coming to an end, i.e. which prevent the bottom itself being reached. The first of these is wage deflation, i.e. the decline in the real earning per worker of the employed workers themselves. Now, the initial drop in the level of aggregate demand which triggered the crisis has been getting aggravated by the decline in employment anyway; but this is further accentuated by the decline in the real earning per head of the employed workers. This tertiary drop in demand, compounding the primary drop owing to the initial jolt, and the secondary drop owing to the decline in employment, will contribute to a further prolongation of the decline in the level of economic activity and employment.

The second factor is the decline in the level of expenditures of the state governments in the US. While the federal government in the US is allowed to run fiscal deficits, state governments are not: when their revenue drops, as it does in a recession, their expenditure too drops. Now, even though the federal government in the US has run a massive fiscal deficit, most of it has gone for shoring up the banks, adding to their coffers where the money lies quietly, but not generating demand in the economy. That part of the fiscal deficit, which constitutes federal government expenditure on goods and services and which therefore adds to the level of demand in the economy, is quite small, not much more than the currently-estimated decline in the expenditure of the state governments owing to their obligation to balance budgets; but if this decline persists, and exceeds anticipations, then this federal fiscal stimulus is likely to get swamped by the decline in state government expenditures.

The third factor consists in the fact that even this level of federal fiscal stimulus is unlikely to be sustained over time. Finance capital, as is well-known, is opposed to any direct State intervention in demand management: it prefers “sound finance”, i.e. the State balancing its revenue with expenditure, or, at the most, running a small, pre-determined magnitude of fiscal deficit relative to GDP. So, even the current level of the fiscal deficit, which the Obama administration is running, is anathema for finance capital, and the large number of conservative economists and commentators who articulate its positions. The very suspicion that the bottom has been reached, if it gets spuriously confirmed by, say, the unemployment figure not registering an increase for a couple of months, will increase pressure on the federal government to cut down its fiscal deficit, which will once more push the US economy back into a decline.

This is exactly what had happened in 1937, when, after the initial phase of the New deal appeared to have ended the decline started by the Great Depression, President Roosevelt was pressurised into cutting back the federal fiscal deficit, with the result that the US economy plunged once more into a depression, from which it recovered only through the resurgence in military spending that marked the onset of the second world war. At present, so strong is the pressure for cutting back on the fiscal deficit in the US that even if the bottom of the recession is not reached, president Obama will still find it hard to sustain the tempo of deficit spending; any suspicion that the bottom has been reached will make the pressure irresistible, pushing the economy back into a decline.

A WHOLE NEW

CONJUNCTURE

All this would suggest that the crisis in the US is far from over; and if so, then the crisis in the world economy too is far from over. But there is a deeper reason why the crisis is not over, and that is because the crisis is not just a recessionary crisis, as is commonly supposed. In fact the current world capitalist crisis is such that if it does not appear in one particular form, then it will appear in a different form. Recession is just one of the forms in which it appears. If the recession abates, then the crisis will appear in a different form, namely that of a sharp inflation affecting in particular energy and food prices, which incidentally is the form in which it had appeared before the recession.

The crisis therefore must not be identified with only one particular form; it represents a whole new conjuncture. When we look at this conjuncture in its totality, then it becomes clear that overcoming it within the parameters of the capitalism we have known till now, does not appear possible. To say this is not to say that capitalism will collapse, that never happens; nor is it to suggest that the crisis will necessarily persist in one particular form, e.g. that the recession will never be overcome. The point being made is that capitalism, as it has existed hitherto, has entered into a period of permanent crisis, from which the system may still emerge through substantial restructuring (if it does not get transcended altogether), but only after a considerable time, through much groping, and the creation, through such groping, of an appropriate political balance of class forces that will carry out such restructuring. In short, as in the inter-war period, we are entering into a phase of capitalism where a major qualitative transition, as distinct from the mere playing out of its immanent tendencies, has come on the agenda. Where that transition will lead, will be decided ultimately by the outcome of political struggle; but the conjuncture that has brought such a transition on to the agenda is the crisis.

CHARACTERISTICS

OF THIS CONJUNCTURE

What are the characteristics of this conjuncture and why has it come about? In a modern capitalist economy, as is well-known, if the level of economic activity is pushed beyond a point, then this gives rise to an inflationary upsurge. This happens for a variety of mutually-reinforcing reasons: as the relative size of the reserve army drops below some threshold, the workers’ bargaining strength improves, money wage claims begin to mount, and since capitalists price their products as a “mark-up” over their unit variable costs, inflation ensues. Likewise, when the level of activity increases beyond a point, raw material prices begin to climb, which again get “passed on” through higher prices, calling forth higher money wage claims (even to defend the prevailing real wages), and hence, once more, escalating inflation. This point beyond which an inflationary upsurge ensues, and which, following Joan Robinson’s terminology, one can call the “inflationary barrier”, sets a limit to the feasible level of economic activity in a modern capitalist economy. The actual level of economic activity can be less than this, but not above this, in any period, if capitalism is to remain viable. Now, the conjuncture constituting the current crisis is characterised by the fact that this “inflationary barrier” has got lowered, i.e. the level of economic activity at which an inflationary upsurge will arise has got reduced. The economy can perform below this level, as it is doing now in the capitalist world, but that constitutes recession. But as it gets out of the recession, precisely because the “inflationary barrier” has got lowered, it would soon get into an inflationary upsurge. Hence it is not the recession alone that constitutes the crisis, or inflation alone; it is the totality of the conjuncture where getting out of one form of the crisis entails getting into another form of the crisis.

This conjuncture has arisen because, on the one hand, there is an enormous concentration of finance capital, looking around for speculative gains, which can move into particular commodity markets whenever there is a whiff of possible scarcity, or of the possibility of creating a scarcity; and on the other hand, the scope for an easy augmentation of supplies has got exhausted in the case of a number of commodities. In a whole range of agricultural commodities where production is carried out by a mass of petty producers, the very fact of their impoverishment under a regime dominated by international finance capital, has made supply augmentation difficult; indeed even simple reproduction on their part has become difficult, as is evident from the vast numbers of peasant suicides in India. The withdrawal of State support, which they enjoyed under the post-independence dirigiste regime, but no longer do under neo-liberalism, has pushed large numbers of them into unviability, where they cannot cope with the needs of the capitalist world economy. In the case of other commodities, like oil, the end of the colonial arrangement has meant loss of control over this crucial resource by the capitalist metropolis. Production is now controlled to a significant extent by OPEC, which no doubt is amenable to pressure by imperialism but cannot just be dictated to by it. And imperialism’s large-scale bid for re-colonisation, entailing a reacquisition of control over this resource, though persistent and continuing, has run into rough weather. It is this conjuncture that constitutes the crisis, which must not therefore be identified only with its recessionary form.

NATURAL GAS FROM KRISHNA GODAVARI (KG) BASIN

Who is the Owner?

Dipankar Mukherjee

IN normal circumstances in the pre-reform or pre-globalisation era, such a question would not have arisen at all in India. By virtue of Article 297 of the Constitution of India, all petroleum reserves, including gas reserves in their natural state in the territorial waters or the continental shelf or the exclusive economic zone of India vest in the Union of India and are held for the purposes of the Union. The government is therefore the sovereign owner of KG basin gas for distribution of gas for public good viz fertilizer production, power generation, transport, industry, domestic use etc. That being the case, why does the government of India – after 59 years of the adoption of our Constitution – need to reassert its ownership of KG gas today in July 2009? Has its sovereign ownership been challenged by any foreign country? No. In an affidavit filed in the Supreme Court on July 18, 2009, the sovereign Bharat sarkar pleads that by a privately negotiated settlement vide an MoU dated June 18, 2005 between CMD, Reliance Industries Limited (RIL) and CMD, Reliance Natural Resources Limited (RNRL), KG basin gas, whose ownership vests with Union of India, has been used as private property. Bharat sarkar now pleads the court to annul the MoU.

So, four years after the MoU, the government of India wakes up from its ‘kumbhakarna’ slumber to complain that its property worth thousands of crores of rupees has been usurped by the two brothers –– a property which is a major energy source for electricity and fertilizer to a gas-starved country. What was it doing all this time? The whole nation was agitated when Pakistani intruders sneaked into Kargil without the knowledge of the Vajpayee government ten years back. The intruders stealthily captured about 150 sq km of Indian land in the inhospitable hilly terrain and they were subsequently thrown out by the Indian armed forces. Here, in this case, in broad daylight in the name of a production sharing contract, an Indian industrial house openly treats 339 sq km in KG basin like its family property for four years and yet the sovereign government of India is helpless! Instead of asserting its rights years back, it is now moving from one court to another pleading for its right to intervene. And why is it playing the role of a mediator rather than an owner? To find out the reason for such abject surrender to the corporate might, one has to look at the background.

THE

BACKGROUND

Before economic reforms were initiated in the early nineties, ONGC and Oil India Ltd were the only gas exploration and production companies, owned by the government of India. The distribution and marketing of gas was being carried out by the Gas Authority of India Ltd (GAIL), another PSU formed in 1984 with the specific task of forming a national gas grid for gas distribution in the country to ensure regional balance. As a part of reform process, the government decided to invite private investment for exploration and production of oil and gas. New Exploration and Licensing Policy (NELP) was notified in 1999 to award oil/gas blocks to private companies as contractors. In this process a Production Sharing Contract (PSC) was executed in April 2000 between the government of India and undivided RIL and its minor (10 per cent) partner NIKO Resources Limited for production of gas in an area of 339.41 square kilometer in KG basin (D6 field). After the dispute between the two siblings, Reliance Industries Ltd (RIL) was demerged into two companies viz RIL and Reliance Natural Resources Ltd (RNRL), which went to the younger sibling. The MoU of June 2005, which the government of India is now asking to be nullified, stipulated that the gas produced from KG basin as per PSC will be utilised as follows:

· Quantity of 12 million metric standard cubic metres of gas per day (mmscmd) will be given to NTPC

· The next 28 mmscmd would go to RNRL

· The rest will be supplied in 60:40 ratio with 60 per cent to RIL and 40 per cent to RNRL

· The pricing of the gas was stipulated at 2.34 dollar/mmbtu (million British thermal unit)

The above MoU inter alia ignored the sovereign ownership of the government over KG gas on two major parameters viz allocation of gas and the pricing of the same. The government now admits in its Special Leave Petition (SLP) before the Supreme Court in its affidavit in July 2009 that rights of Union of India have been infringed for the following reasons:

· That RIL and RNRL cannot settle between themselves as to how the gas, which is a national asset and a natural resource that vests in the government of India and which is to be utilized for the wider and larger interest of the nation, is to be distributed. It is not the private property of RIL and RNRL and any understanding arrived at between them is not binding upon the government of India.

· The gas has to be distributed in terms of the government-approved Gas Utilisation Policy and at a price approved by the government.

But then why, after four years?

HIDE & SEEK GAME

BY THE UPA GOVT

The government now says that it became aware of the MoU only after the relevant portion of the MoU was placed before the Mumbai High Court in October 2008 in course of the litigation between the brothers.

It is absolutely untrue. On April 14, 2006 RIL approached the Ministry of Petroleum & Natural Gas (MOPNG) seeking the approval of the sale of gas to RNRL at 2.34 dollar/mmbtu and RNRL sent a letter on the same subject to the government on May 09, 2006. In between, on May 04, 2006 the then CPI(M) MP, late Chittabrata Majumdar sought the intervention of the minister of petroleum and natural gas in the matter. The relevant extract of the letter is quoted here:

“I understand RIL has recently signed a Gas Sale Purchase Agreement (GSPA) with Reliance Natural Resources Ltd (RNRL) without any bidding or competitive arms length process, to supply gas at a contracted price of 2.34 dollar per mmbtu whereas currently India imports gas from Qatar at an estimated price of 6 dollar/mmbtu. RIL by this agreement with RNRL is going to supply gas cheaply, that too as large a quantity as 40 mmscmd (current total domestic gas availably for customers in the country is 72 mmscmd). RIL is, therefore, seeking to transfer the benefit of gas find to a related private company at a cheaper price…..This benefit should actually flow to the people by virtue of Article 297 of the Constitution of India as per which petroleum in its natural state is vested in the Union of India. The government grants the exploration license in overall interest of the country.”

“I, therefore, request you to kindly intervene so that natural gas from KG basin explored by RIL, is auctioned through competitive bidding and the government can utilise the gas-find through GAIL which can set up its own pipeline for transportation and consumption of gas in power and industrial sector as a part of overall energy security and regional balance.”

The letter was acknowledged on May 25, 2006.

The government was therefore never in dark when the KG basin gas became all of a sudden a family affair. In fact, the government has both overtly and covertly encouraged a settlement between the squabbling siblings at the cost of surrendering its ownership right on the natural gas. Otherwise, it would have intervened on behalf of NTPC, the government-owned power generation company whose 2700 MW gas based thermal projects (Kawas and Gandhar) are kept on hold because of RIL’s refusal to supply them the required gas. That is another part of the hide and seek game being indulged by the UPA government.

NTPC-RIL CASE:

GOVT’S DECEIT

The government of India so far has been more concerned about the pricing of gas than about asserting its ownership rights on the same. Why? Because, gas pricing of 2.32 dollar/mmbtu in the June 2005 MoU, signed between the two siblings, was based on the gas price offered by RIL and accepted by NTPC in June 2004. In a written reply to a question dated February 20, 2009 in Lok Sabha the then minister of state for power, Jairam Ramesh stated:

“NTPC invited bids under international competitive bidding for procurement of natural gas amounting to 132 trillion British thermal units per annum for Kawas-II and Gandhar-II power projects for a period of 17 years. Reliance Industries was evaluated as the lowest techno commercially acceptable bidder and NTPC accepted its offer. Accordingly a Letter of Intent (LOI) was issued to RIL on June 16, 2004 which was duly acknowledged and confirmed by RIL.”

RIL’s bid was for supply of 12 mmscmd of gas from KG basin at 2.34 dollar/mmbtu to NTPC for 17 years. What happened thereafter? This is what Jairam Ramesh explained in the aforesaid reply in parliament:

“After the issuance of LOI, RIL did not come forward to sign the Gas Sale and Purchase Agreement (GSPA) and sought major changes in the agreed draft of GSPA. NTPC pursued with RIL at various levels and various meetings to sign the GSPA, as per the draft accepted by RIL during the bidding process. However inspite of all the efforts by NTPC, RIL did not sign the GSPA agreed during the bidding process.”

At various levels? Which level? Did the MOPNG, as a nodal ministry of the government that now asserts its ownership on KG basin, intervene and ask the contractor i.e. RIL to supply gas to the government-owned company as per the agreed terms so that 2700 MW of power is made available by NTPC to the people of this country? No. Instead, an aggrieved NTPC filed a suit in the Bombay High Court on December 20, 2005 against RIL’s refusal to sign the GSPA. The case is still sub judice and 2700 MW power – much cheaper than the much tom-tommed nuclear power – remains elusive.

In the litigation between RIL and RNRL, earlier in Bombay High Court and now in the Supreme Court, the government of India rushes to act as a mediator. This alacrity is glaringly absent on the part of the government in the litigation between its own company NTPC and RIL, which involves providing power to the aam admi. The UPA government was eloquently silent and did not support the NTPC even for once during the last four years. On the contrary, in one of the rarest case of deceit and deception, it weakened the case of NTPC by forming an Empowered Group of Ministers on September 12, 2007, which fixed the gas price at 4.2. dollar/mmbtu –- an arbitrarily determined high price that RIL had been bargaining for all along.

If this is the price of gas approved by the government, where does NTPC’s case stand? By indirectly sabotaging the NTPC’s case, the government has at one stroke hiked the price of power and fertiliser – both key inputs in the grim agrarian sector. The public sector company, ONGC, presently supplies gas to NTPC, another PSU, at 1.8 dollar/mmbtu. The neo-Congress leaders of UPA government, who relentlessly chant the mantra of “people’s ownership” to justify their disinvestment, want the same gas owned by the people of this country to be contracted to a private family by the government who would then extract 2¹/₂ times more price at people’s expense!

REAL PEOPLE’S

OWNERSHIP

Clearly, it is high time the government must come clean on this issue. Now it has belatedly but rightly asserted that KG basin gas is government’s property. Better late than never. Let them act on what they have asserted i.e. people’s ownership of KG basin gas which does not belong to a family – divided or undivided. The first follow up step to act on people’s ownership is to take over the distribution and marketing rights of gas at the delivery end from RIL which has violated the PSC by unilaterally assigning to itself the power of an owner. The next step is to entrust Gas Authority of India Limited (GAIL) with the responsibility of transportation, distribution and marketing of KG basin gas. This will be in line with para 2.4 of the union cabinet note for formation of GAIL in January 1984 which stated “In the course of time, it is visualised that national grid of gas pipeline will have to be developed, having regard to gas availability, utilisation pattern and the capital investment involved.” The idea was clear – ONGC, OIL and GAIL, owned by people of India, will produce and distribute natural gas, a major energy source to ensure regional balance and allocation to priority sectors. The UPA government has abandoned that path. “People’s ownership” does not mean selling of PSU shares in share market. It means assertion of State control of vital natural resources like gas, owned by the people of this country and not by one corporate or other, in the interest of aam admi.

Disinvestment – For What?

Dipankar Mukherjee

“Therefore, if the objective of the government were to bridge the resource gap by disposing of the capital assets, in order to meet the consumption expenditure, it would simply not be permissible by any amount of fiscal prudence. If you have Rs 2 lakh crore of fiscal deficit; in two years you can dispose of all the assets which you have; then, what are you going to do from the third year? Therefore, we would like to know the basic objectives. You shall have to decide on that. We would like to have a categorical answer from the government. It is not merely a question of disinvestment.……In the last ten years, no consensus has developed on these particular aspects. Disinvestment for what objective? What are you going to do with the proceeds of the disinvestment? Is it only to bridge the Budgetary gap? Is it prudent to dispose of the capital assets and use it for meeting the normal consumption expenditure? Should you not explore the possibility of reducing your fiscal deficit through other appropriate ways? All these questions would surely come.”

The above questions were raised by none other than the present union finance minister Pranab Mukherjee in Rajya Sabha eight years back when he was in opposition, just before the budget on February 27, 2001 while moving a Calling Attention Motion on the disinvestment of BALCO. The questions still remain unanswered. No consensus has developed as can be seen from the stand of different political parties during the debate on the motion of thanks on the president’s address on June 4, 2009.

Why then this urgent call for disinvestment in select PSUs? Is it only because the “Left road block” has been removed after five years? But then the above words of wisdom were uttered eight years back when Congress did not need the support of Left to remain in opposition! The clue is there in the above mentioned speech of Mukherjee when he said:

“…I read from the newspapers saying, “Stick to the deal: FICCI advices the government.” They would like to have total private sector and total market economy everywhere. It is not today: from day one, they are demanding that.”

That is the crux of the issue. Who wants disinvestment? FICCI and other industrial bodies like CII, ASSOCHAM etc who were goading the then disinvestment minister Arun Shourie in 2001, and who are now fixing the agenda for the new government. It is they and not the people of this country who are yearning for ownership in PSUs.

PEOPLE’S OWNERSHIP
THROUGH SHAREMARKET?

People of the country elect their representatives in parliament and through parliament elect their government. Public Sector Enterprises are owned by the government and not by the government of the day. People’s ownership in PSU is ensured through parliament, elected by the people. The ownership of the people through Parliament can not be diluted by ownership of a few people through share market. The fallacy of this newly coined word of “people’s ownership” to conceal the process of “creeping privatisation” i.e. privatisation in phases, becomes clear if one looks the disinvestment of shares of BHEL, a navaratna PSU carried out by the Congress government during 1991-1996 when Dr Manmohan Singh, as the finance minister initiated the process of selling shares of PSUs. The Left parties, when they opposed and stalled the selling of 10 per cent shares of BHEL during the last UPA regime, threw at the government’s face the following share holding pattern of BHEL to expose the fallacy and real intent of such disinvestment in the name of “people’s ownership”.

BHEL’s Share Holding Pattern

Category of Share holder % of Shares

Government of India 67.72
Foreign Institutional Investors 17.03
Mutual Funds 05.14
Insurance companies 03.83
Bodies Corporate 03.86
Individuals holding nominal share 01.92
capital up to Rs 1 lakh and others

The above clearly shows that in the name of people’s/ workers’ ownership of shares, about 21 per cent shares were handed over to FIIs and private corporates during Dr Manmohan Singh’s tenure as finance minister and the so-called people’s share was only 1.92 per cent. Similar was the case of NTPC and other blue chip PSUs, where FIIs and private corporate grabbed most of shares, disinvested through this process.

CONGRESS Vs
CONGRESS

The presidential speech on disinvestment more or loss reiterates Congress manifesto for the 15th Lok Sabha election which states:

“The Indian National Congress rejects the policy of blind privatisation followed by the BJP-led NDA government, but believes that the Indian people have every right to own part of the shares of public sector companies while government retains majority share holding.”

The “blind privatisation” led to the defeat of NDA in 2004 election. Congress is now trying “enlightened privatisation” through back door in the name of the people! If Congressmen of post 1991 vintage were really interested in forms of public participation in public sector, they could have looked into the report of a sub-committee of the Congress Party appointed by the then prime minister Jawaharlal Nehru on April 10, 1958 to consider the problems relating to State-owned corporations and companies and to suggest better parliamentary supervision. The 10-member sub-committee, headed by V K Krishna Menon included Feroze Gandhi, Dr P Subbarayan, Mahavi Tyagi among others. The sub-committee had recommended the following on the question of public or employee’s participation.

“As it must be the aim to enable workers to participate not only in management but also as functionaries and owners in a direct way these shares may be either confined or made preferentially available to those engaged in the industry and a Director can then be drawn from the ranks of the investing employees. ......Such shares shall not be available for purchase by private corporations or business concerns.”

Is it acceptable (especially the portion emphasised)? Or is it regressive for the present Congressmen inspired by “Reform” mantras? After all, they are now so taken in by the repeated query of the corporate and the elite circles “where from the resources will come for social sector expenditure”? As though social sector expenditure in education, health and social security is a one time expenditure which can be dispensed of by selling the PSU shares in one or few tranches? But is resource really the issue?

UPA GOVT’S RECORD
WITH PSU RESOURCES

The reserves and surplus of Central Public Sector Enterprises was Rs 2.59 lakh crore in 2003-2004 when the UPA government came to power. The same has gone up by another Rs 2.26 lakh crore and stood at Rs 4.85 lakh crore in 2007-2008. Who stopped them to use this amount of Rs 2.26 lakh crore for any productive purposes, including social sector expenditure? As a matter of fact, out of this huge reserve and surplus, an amount of Rs 1.42 lakh crore is being utilised in non-productive financial investments. For example, NTPC, a navaratna PSU, was having as on March 31, 2008 cash and bank balance of Rs 14,933 crore, out of total reserves and surplus of Rs 44,393 crore? Do you have to sell shares worth Rs 10,000 crore to Rs 15,000 crore while similar amount of huge money is locked in non-productive reserves? The pet answer is — these reserves are for the company’s expansion and future projects. But is that true? No. Nobody invests all his money, whether capital or reserves, to run a business or start a project. The investor puts a part of it as equity from his/her pocket and borrows the rest from banks as debt. For all big private sector players, the government is now permitting 4:1 debt equity structures i.e. for every one rupee investment the private sector can borrow 4 rupees from the banks and financial institutions (FIs). They are therefore low equity (i.e. their own investment) and high debt companies, with debts borrowed mainly from public sector banks and FIs. On the contrary the Public Sector Enterprises have high equity and low debt. At a time, when banks are having huge funds at their disposal, the government-owned CPSEs can borrow from banks based on present debt equity position. As on date CPSEs together have roughly a debt equity ratio of 1:2 i.e. the equity is double the amount of debt. To be more precise, as per latest Public Enterprise Survey 2007-2008, CPSEs have an equity of more than Rs 6 lakh crore against a long term loan of Rs 3.2 lakh crore.

CREEPING PRIVATISATION
INSTEAD OF ‘BLIND PRIVATISATION’

The CPSEs, therefore, in the line of private sector can borrow safely an amount of Rs 15-20 lakh crore from the banks and FIs without shedding any equity shares i.e. without any disinvestment. Who stops them? Why then should they go for selling shares of a petty amount of Rs 20-30 thousand crores? Is there any economic logic?

No. The objective is neither people’s ownership nor overcoming resource crunch. It is located much deeper in the ideological concept of free market economy where public sector has no place. The objective is only privatisation i.e. change of ownership of CPSEs. The routes are different – “Shouriean” way of what the Congress calls “blind privatisation” or the “Manmohanimcs” route of “creeping privatisation” under different nomenclatures viz retail investor, workers’ participation or now the people’s ownership.

“For God’s sake do not try to befool every body that only disposal of capital assets is the core of economic reforms”, bemoaned Pranab Mukherjee on December 04, 2002 while initiating a short duration discussion on disinvestment in Rajya Sabha. We can only tell the Congressmen of pre-91 vintage –– for the sake of Congress leaders like Nehru, Krishna Menon and Feroze Gandhi, do not befool the people that “creeping privatisation” is people’s ownership.

INDIA'S ECONOMIC CRISIS AVERTED BY COMMUNISTS

Return of the state

PRABHAT PATNAIK

The hegemony of finance capital that underlay neoliberalism is unlikely to persist in the old form.

THE HINDU PHOTO LIBRARY

John Maynard Keynes, who advocated "socialisation of investment".

THE Great Depression of the 1930s was a spectacular practical demonstration of the contradictions of “laissez-faire capitalism”. John Maynard Keynes, the renowned economist, writing in the midst of the Depression, had attributed the failure of markets, especially financial markets, to their intrinsic incapacity to distinguish between “speculation” and “enterprise”, and to get dominated by the activities of speculators to a point where “enterprise becomes the bubble on a whirlpool of speculation”. As a result, the level of employment and output in the economy, and hence the livelihoods of millions of people, became dependent on the whims and caprices of a bunch of financial speculators, “a byproduct of the activities of a casino”.

Keynes was opposed to socialism and was a defender of the capitalist system, but he saw that major repair had to be done to the capitalist system if it was to survive. The repair he recommended was “socialisation of investment”, that is, state intervention to ensure that the level of investment in the economy was such as to achieve “full employment”.

The basic argument that “laissez faire capitalism” is fundamentally irrational (insofar as it makes employment and output the byproduct of the activities of a casino), and hence needs to be replaced by state intervention, has never been successfully refuted by neoliberalism. Indeed, intellectually, neoliberalism has always been vacuous, in the most elementary sense that the assumptions required by neoliberal theory to show the salutary consequences of the unfettered operation of markets are either palpably unreal, or at palpable variance with other assumptions required for the same demonstration, making the argument logically inconsistent.

The resurgence of neoliberalism against the Keynesian position, therefore, was a result not of its intellectual persuasiveness, but of its being promoted by the new hegemonic entity in world capitalism, namely, international finance capital, whose ideology it constituted. Of course, the Keynesian prescription for capitalism, that is, state intervention in demand management, had ceased to work. But this fact did not mean that the Keynesian diagnosis was wrong, and nobody has succeeded in proving otherwise. What is more, the fact of the Keynesian medicine not working any longer was itself the result of the emergence of international finance capital.

The state whose intervention Keynes had advocated was necessarily a nation-state, and in a world where finance was globalised, that is, in a world characterised by international finance capital, the capacity of the nation-state to pursue policies of its choice was necessarily undermined: any set of policies that are not to the liking of international finance capital would provoke the flight of such capital to other shores, plunging the original host economy into dire straits. Keynes was aware of this constraint upon demand management and hence was very particular that “finance above all must be national”. But the spontaneous tendencies of capitalism, towards the concentration of finance in larger and larger blocs and its deployment all over the world in quest of speculative gains, operated even within the regime of Keynesian demand management, and ultimately undermined it from within.

Undermining the old regime, however, was not enough for finance capital. An alternative new regime had to be erected, which would facilitate the global movement of finance by removing all barriers to such movement; which would permit finance capital to pick up “for a song” profitable public sector enterprises and scarce and valuable natural resources that had been largely nationalised following decolonisation in the Third World; and which would turn the state from being a Keynesian (or for that matter a Nehruvian) state into one that was actively engaged in promoting the interests of international finance capital, of which the domestic financiers and the high bourgeoisie constituted a component. This transformation, which required not just the thwarting of Keynesianism (or of Nehruvianism or of Third World nationalism, generally) but actually transcending the latter, institutionalising an alternative regime to the ones that were in force, had to be sustained by an ideology. Neoliberalism was that ideology.

Neoliberalism had not disappeared during the heyday of Keynesianism. It had been overwhelmed, but it continued to exist, pushed to the fringes and advocated by die-hard believers like Milton Friedman who were looked upon with amused tolerance by “mainstream” economics, even as debates within the latter centred on different versions of Keynesianism. Even Richard Nixon famously said in 1971: “We are all Keynesians now.”

Neoliberalism’s emergence from the shadows was the theoretical counterpart of the emergence to dominance of international finance capital through, inter alia, the progressive removal of capital controls, which had characterised the Bretton Woods System, first in the advanced countries during the 1960s and later in the developing countries.

G.R.N. Somasekhar

Indian financial institutions have largely escaped the effects of the unfettered operation of financial markets because, thanks to the opposition of the Left and other progressive forces, financial liberalisation in the country has not proceeded far enough. Here, a May Day rally organised by the Centre of Indian Trade Unions in Bangalore in 2008.

What is occurring in world capitalism now is a reaffirmation of Keynes’ proposition that financial markets, precisely because they get dominated by speculators, function like casinos. Financial crises, resulting in severe depressions, are inherent to the functioning of this “free market” system. In fact, efforts by the state to prevent such crises, through “bailout” packages, when successful in the short run, have the perverse effect of further emboldening speculators to become even more reckless, and hence creating the potential for even more severe crises in the future. Financial crises in this sense resemble earthquakes: if they do not happen for some time, then when they do happen they are even more severe.

Government intervention to prevent such crises in an economy dominated by finance capital, and hence open to speculation, prevents a current crisis by creating the conditions for a far more severe future crisis. To say this is not to suggest that the government should allow financial crises to occur, but to argue that the neoliberal regime that permits financial crises to occur at all should be transcended. (Many, including myself, would argue that this is not possible without transcending capitalism itself, but that discussion need not detain us here.)

Keynes had said with remarkable prescience: “As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase.” One of the “improvements” in the organisation of financial markets in recent years has been the development of the “derivatives” market, the total value of trade in which in 2007 was 40 times the total gross domestic product of the world economy. And confirming Keynes’ prognosis, this has been a major stimulus to speculation and hence a major factor behind the severity of the current financial crisis.

Loans made by investment banks, for instance, are “cut up” and re-bundled for sale to others in the derivatives market. This has two important consequences: first, the risks associated with holding claims upon the ultimate borrowers get hidden from those who hold these claims. Derivatives, in short, lead to risk-concealment, which means that the euphoria of a boom in the prices of assets, against which loans are made, continues much longer than would have otherwise been the case. Secondly, even when the risks are not concealed but are known, the market ensures that the least risk-averse are left holding the maximum risk. This, too, by lowering the general level of risk-aversion in the economy, implies that speculation continues much longer than would have otherwise been the case. It follows that the development of the derivatives market has the effect of prolonging speculative booms, and hence intensifying the magnitude of the crash when it finally comes.

The Left’s resistance

All these factors have been at work in the current financial crisis. Its root cause lies in the unfettered operation of financial markets, which is an essential part of the neoliberal package and which is promoted by finance capital. The fact that Indian financial institutions have largely escaped this crisis is precisely because, thanks to the pressure of the Left, “financial liberalisation” has been somewhat checked, despite the best efforts of Manmohan Singh and the other leading luminaries of our neoliberal contingent.

Not that India will escape the consequences of the world financial crisis, but this is because the shifting of funds by the foreign institutional investors (FIIs) will result in a mutually reinforcing downward movement in the prices of stocks and of the rupee, and also because any recession in the world economy within the neoliberal regime will entail the import of unemployment into our economy and a crash in the prices of cash crops for the peasantry. (The collapse of the financial giants on Wall Street has already put a question mark over employment prospects in Business Process Outsourcing units and call centres.)

G. Moorthy

At the annual general meeting of the Madurai District Pensioners’ Association in Madurai on September 16. If pension funds had been deployed on the stock market, as the neoliberals had wanted, then the loss in their value would have meant either acute suffering for old-age pensioners or an inordinate drain on the government’s budget for rescuing pension funds.

But this transmission mechanism will, at least, not be supplemented by an additional imported financial crisis, as is happening with British and continental banks, because financial liberalisation has not proceeded far enough, and certainly not as far as our domestic neoliberals would have liked. Likewise, if capital account convertibility had gone through, as those setting up the successive Tarapore Committees had wanted, then the collapse of the stock market, and the threat to the value of the rupee in the foreign exchange market, would have been far greater than now, since it is not just FIIs but even the domestic wealth-holders who would be shifting funds out of the country. Similarly, if pension funds had been deployed on the stock market, as the neoliberals had wanted, then the loss in their value would have meant either acute suffering for old-age pensioners or an inordinate drain on the government’s budget for rescuing pension funds.

Ironically, Chidambaram has been reportedly shoring up the stock market by asking public sector banks to buy up stocks, an option that would have been denied to him if his own advocacy for privatising public sector banks had succeeded. Ironically, too, the most ardent advocate of privatising insurance in the country was the AIG, the world’s largest insurance company, which is at present in the doldrums and rescued only through a loan of $85 billion by the United States government.

The country has been spared all this because of the stout opposition mounted by the Left and other progressive forces against neoliberal policies. But it is also important to draw a salutary lesson from all that has happened. Any economy is ill-served when its affairs are entrusted to a group of persons who are wedded to an ideology that is intellectually vacuous and owes its apparent triumph only to the fact of its being promoted by the self-serving needs of international finance capital.

That ideology, however, has run its course. The solution to the crisis that its triumph has precipitated is increasingly being seen to lie in the part-nationalisation of financial institutions in the capitalist world, which represents a negation of its basic premise. Originally it was thought that an “injection of liquidity” was all that was needed to overcome the crisis. But the obvious question was: injection of liquidity where? The reason why credit has dried up all over the capitalist world is an increase in the lenders’ perception of risk, since the solvency of the borrowers has become suspect owing to the presence of a plethora of “toxic” securities in the system.

If A does not have confidence in the solvency of B so as to be willing to lend to B, then simply improving A’s access to liquidity is unlikely to make any difference. Of course, if B’s access to liquidity can be improved, then, since B is of dubious solvency and hence cash-strapped, this may help overcome the crisis, provided that this liquidity is available on a fairly long-term basis and provided that B uses it wisely. The only way that such liquidity can be made available without arousing public ire is through part-nationalisation, whereby the government injects funds in lieu of equity.

The European governments, especially the United Kingdom and Germany, have accepted this idea, and British Prime Minister Gordon Brown has already put it into practice. The Americans, however, have been reticent, which is why Treasury Secretary Henry M. Paulson’s original “bailout package” (involving simply the government’s buying out “toxic” securities) had such a rough weather (though Paulson now seems willing to consider nationalisation). Likewise, even measures such as guaranteeing inter-bank loans, which European governments have announced, are unlikely to get public support unless control over the behaviour of banks is exercised as a quid pro quo. The rescue operation from the crisis, therefore, will entail in a basic sense an abandonment of neoliberalism.

If nothing else, the extreme public anger against the international financial oligarchy will ensure this. In the face of this anger, directed against a bunch of greedy speculators who have brought the world economy to the brink of ruin, the hegemony of finance capital that underlay neoliberalism is unlikely to persist in the old form. How the crisis and its sequel unfolds remains to be seen, but the world will not go back to what it was before.