COVID-19 & THE ECONOMIC CRISIS

M Aseem //

It was Karl Marx who enriched humanity by developing the scientific methodology of historical materialism to analyse the system of social production. But even ancient Greeks in the time of Aristotle knew that no value could be produced without employing human labour. Capitalist owners, shareholders, managers and their courtiers from the ‘intelligentsia’ only partake in the surplus appropriated from the value produced by workers, they themselves do not add any value to the stock of social wealth. Hence only the naïve and simpletons were applauding when, instead of deploying the strategy suggested by medical science, extensive screening and testing with quarantining and isolation of infected in massive public healthcare facilities to be urgently created for this purpose, complete and forced lockdown was imposed by the central government as the primary method to deal with Covid-19 pandemic. Those participating in this comic applause and beating of pots and pans imagined themselves to be now safe, behind the high walls of their gated colonies and apartment ‘societies’, from the danger of Corona infection that will now feed only on the working-class multitudes in the filthy congested urban slums.

Neo-Liberal Economic Policies

All the more so as the Covid-19 pandemic has struck the humanity at a juncture when already moribund and crisis ridden capitalism has been dismantling even the modicum of public healthcare facilities existing earlier by giving full play to neo-liberal economic policies of privatisation, minimal public regulation, handing over of all natural resources to capitalists at throw away prices, lower rates of direct taxes, ‘austerity’ in expenditure on common public facilities for education, healthcare, housing, transport, etc. during last 4 decades. This freed capitalists from all shackles on intensification of rate of exploitation through extracting both relative and absolute surplus value at increasingly higher rates. This is driven by consistently raising the organic composition of capital, especially through very high amounts of investments in fixed capital component of the constant capital, reducing the proportionate requirement of employing variable capital or labour power per unit of output. This has resulted in a huge reserve army of unemployed labour.

On the other hand, this has ‘freed’ most workers from whatever minimal protection of labour laws and collective bargaining under trade unions they had. Overwhelming majority of the workers now work under so-called ‘zero-hour’ contracts, getting paid wages lower than the value of their labour power under the weight of huge supply of labour compared to demand, paid only for the specific time worked with no regular employment or wages, no labour laws, no fixed working day, no insurance or health check-up, no compensation for accidents, ‘free’ from all shackles in serving the interests of the super profits of the capitalist class. Hence, while capitalists have accumulated immense amount of wealth, more and more workers are being pushed into pauperization.

Existing Crisis in the Capitalist Economy

However, as Marx explained, since all value addition in production process comes from variable capital or labour power employed, the proportionately lower quantity of variable capital employed per unit of output produced, the per unit surplus value or the rate of profit on per unit capital also tends to decline. But the increased unit sales at lower price counteracts this decline in rate of profit and the total profit can still be higher. However, soon the higher supply of production at lower value by all the capitalists chokes the market resulting in the crisis of overproduction.  

Here an additional factor, loan capital, comes into play since the huge investments in fixed capital usually come from capital loaned by banks/financial institutions to industrial capitalists who need to pay interest on loan capital. This interest comes out of the surplus value appropriated by the industrial capitalists on total capital, i.e., they pay a part of the total profit extracted to the banks. However, when the sales decline because of overproduction either the industrial capitalists reduce production by operating at lower capacity utilization or produced commodities cannot be sold. In the first case, total surplus value appropriated by capitalist itself declines. In the second case, they cannot realise the amount of surplus value embedded in commodities produced, i.e., it cannot be transformed into money capital by completing sale of the commodity. In both cases result is loss or reduced profit insufficient to cover the amount of interest payable to banks on capital loaned by them. This results in bankruptcies of many capitalists, as a result of which either they are liquidated or gobbled up by larger capitalists. Along with this the crisis spreads to the banking/financial system as part of the already loaned capital needs to be written off and more capital cannot be loaned because of the uncertainty of creditworthiness as the banks are not sure which of the borrowers will survive the crisis. Hence, there might be a situation when markets are overstocked with goods unable to be sold and banks are full of money unable to lend.

Crisis in Indian Economy

This same process has been in motion in India since the neo-liberal policies were first initiated in the 1980s and then accelerated 1991 onwards. Huge amount of capital investments in constant capital especially its fixed component has been made since then while the value of variable capital has declined proportionately. During this period total corporate borrowings have sharply increased from approximately 10-15% of the then GDP to approximately 60% of the present GDP. After several smaller crises, this ultimately resulted in severe financial crisis in 2008 along with the global financial crisis. At that time ruling class strove to avert this by increased government expenditure as well as nudging public sector banks to make huge loans to the construction and infrastructure sector – roads, ports, commercial real estate, housing, etc. and creating an asset price bubble. However, by 2011 this created more intense crisis which among other things prompted Indian capitalist class to opt for the rule of fascist party. But that has not helped to resolve the crisis and it has been further exacerbated by Demonetisation and implementation of GST.

So, in brief, what was the condition of the Indian economy when the Covid-19 pandemic struck? Severely inadequate aggregate demand in the economy, very low capacity utilisation of the already installed capacity for nearly a decade (in the range of 65-75% per RBI monetary policy reports), huge drop in profitability of capital, lengthening of the duration of circuit of capital as the period of circulation extended, large number of companies not able to cover interest payments on borrowed capital from their operational profits, sharp decline in further investment in new fixed capital formation, and as a result, banks as well as other financial capitalists sitting on huge amounts of accumulated money capital unable to deploy it in productive capital (historically low rates of expansion of bank credit to industry), hence huge increase in financial speculation. Simultaneously government fiscal deficit reached sky high as, one, government sought to keep growth rates high by increased government expenditure during past few years; two, huge amounts of tax and fiscal reliefs/incentives were given to capitalist class; and, three, tax collections growth first stagnated and has then gone down absolutely in a stagnating economy. Hence, even the central government now finds it difficult to provide any fiscal ‘stimulus’ to the economic cycle, fully dependent on monetary authority for action. Another factor is almost bankruptcy of the state government finances.

Why Lockdown?

It was in this crisis ridden situation that the government, even with sufficient advance notice, found itself in no position to take the advice of its own scientific and medical advisors for adopting the appropriate scientific approach of dealing with the pandemic – extensive screening and testing of potential infected persons, identification of confirmed cases, their quarantining/isolation and medical assistance in serious cases in urgently built massive public healthcare facilities and to provide adequate safety equipment for the healthcare personnel. Moreover, Modi’s penchant for spectacular decisions, instead of painstakingly tedious but patient work, to project himself as a ‘superhuman’ leader and statesman also pushed him to declare a complete lockdown of common people and all economic activity, enforced by brute police power without caring a hoot for the livelihood of poor masses and providing for any measures to alleviate their suffering.

Impact of the Lockdown on Working Class

However, in capitalism working class has no means to live but to sell their labour power. Whole of their income is equal to the wages paid to them by capitalists in return for selling their labour power. They have no property, no financial savings at all to fall back upon as the value of their labour power is no more than the value of minimum commodities required by them to live and reproduce the labour power every day. Even with minimal spontaneous class consciousness workers know this and saw the dire crisis of stark starvation facing them since, in the cities, they need to pay for rent, electricity and even for using toilets in addition to the basic food necessities. Hence, even if they could trust government to supply them with rations, they had no hope of survival there. Therefore, they sort of immediately revolted against this draconian order by starting to walk to their rural ‘homes’ where, based on nostalgia of long-gone days, they hoped to at least remain alive somehow, though half-hungry, with their loved ones. However, the Capitalist state immediately came down upon them with all its brute might as the capitalist class wants them to remain in cities for the time when the wheels of industry start turning again. They will rather have them starve so that the wages can be further driven down. But many of them could not be repressed and lakhs of them can still be seen walking, cycling, taking short distance lift packed like sardines in covered trucks/containers in this summer heat, for hundreds and thousands of kilometers throughout the country to reach their native villages. 

Foremost effect of the lockdown on workers is the massive spike in unemployment which has already reached 26% according the latest data published by Centre for Monitoring Indian Economy (CMIE) out of only the 36% working age population participating in the labour force. Hence effectively only 27% of the working age population is now engaged in paid employment. By this we can visualize the unprecedented huge size of unemployed labour army created by already going on economic crisis further accentuated by the current lockdown. Even IMF has forecasted that it will potentially push 40 crore more Indian people below the barely hunger level poverty line, i.e., pauperize them by making them permanently unemployed or compelling them to work on meagre wages much below the value of their labour power. Taking advantage of this bourgeois state is already amended the labour laws and provided the working day to be extended from 8 hours to 12. Moreover, central government has instructed that workers should not be allowed to travel back to their villages but be transported within the same state wherever there is work, i.e., some capitalists require them. This is equivalent to imposing forced labour in labour camps. 

Impact on Capitalist Economy & Finance

In a situation when capitalist economy was already suffering from shrinking aggregate demand and industry was working on low installed capacity utilisation, the lockdown on the one hand has actually made quite a big part of demand to vanish overnight as people hunkering down in their homes lower their consumption, fearful of both the disease and their precarious finances, on the other hand it has brought the wheels of industry to a grinding halt reducing demand for commodities used as constant capital. This implies, one, sharp lowering of the amount of total surplus value being extracted by the capitalist class since no surplus value can be extracted without employing the workers whose labour is the sole source of value addition. Second, circulation period of capital becomes longer and conversion of surplus already embedded in the commodities into money capital will be delayed, thus requiring more working capital and reducing profitability as less cycles can be completed with same amount of capital. Third, since the fixed capital investment is done with loan capital, the amount of interest due to be paid on that continues to accumulate despite no surplus being generated or realised during lockdown. Hence many more industrial capitalists will find themselves unable to repay interest to banks. Though Reserve Bank has asked banks to allow moratorium on repayments for 3 months, instead of reducing interest dues, it will rather increase them as the compounding effect comes into play. Therefore, the repayments will rather become more onerous.

Government Measures

Government, RBI and industry all know this. Hence, to postpone the immediate disaster and find some way out in the meantime, RBI has allowed banks to not treat overdue loans as overdue, i.e., declare them Non Performing Assets (NPA) for 3 months in addition to the existing window of 3 months and the government has now brought out an ordinance to suspend the working of its own much touted ‘reform’ of bankruptcy law for 6 months. This means that the bankrupt businesses will not be declared bankrupt and loans will continue to be recognised as good even if there is no repayment for next 6 months. However, this cannot alter the reality, only kick the can down the road.

To lower the interest burden on the industry, RBI has also made major reduction in interest rates both in the Repo Rate to 4.40% for banks short of money borrowing from RBI and in the Reverse Repo Rate to 3.75% for banks depositing excess money with RBI. The purpose of Repo Rate reduction is to signal banks to reduce their lending rate and by reducing reverse repo rate to force banks to lend more as they will get much reduced return by parking money with RBI. However, despite both measures neither the lending rate has gone down much, nor the banks have started lending, though banks have reduced their deposit interest rates heavily. Statistics released by RBI show that the banks are parking greater than 7 lakh crores of rupees with RBI through reverse repo daily at the low rate of 3.75% instead of lending to industry at much higher rates. At this moment return in the form of interest has become less important for banks than the security of principal since banks do not know which companies will survive the crisis and which will go down.  Same is the case with industry itself as much of the trade is usually done on inter-corporate credit but at this juncture no capitalist is ready to extend credit to other capitalists as there is no trust on anyone’s creditworthiness. Moreover, large corporates are saving their own costs by delaying payments to their Micro Small Medium (MSME) vendors putting them in even more precarious position. 

Hence, most bourgeois experts are suggesting that government should take over the existing bad loans of banks and to provide some kind of future guarantee to banks if their loans go bad. That means transferring capitalists’ private losses to the public finances which will be then balanced through further ‘austerity’ on public services and extortion through higher indirect taxes and levies, fees, fares, etc. from public. That means further dose of neo-liberalism of most pernicious sort.

So, what is the result? First, this will accelerate the monopolisation as smaller industrial and merchant capital will face greater difficulties than their larger competitors and are more at risk of going down. According to Credit Information company TransUnion Cibil, risk of default is highest for these small industries. Second, savers who loan money to industrial capitalists through intermediation of banks will have reduced interest incomes as profitability goes down and more loans are at risk. Many of the middle-class people securing their future through savings route will find themselves insecure as the capitalist class reduces their share in the total surplus value extracted. Third, many financial institutions and bank will find it difficult to survive as credit risk increases, thereby putting savers’ money at risk. Already one big Mutual Fund Franklin Templeton has wound down 6 of its schemes and stopped withdrawals of even a single rupee out of the total assets of Rs.28000 crores. More MFs/Banks/NBFCs/Insurance Companies will be in crisis in coming days as borrowers both in industry as well as individuals, because of job and salary cuts, default in loan repayments. Moreover, with layoffs in jobs and cuts in salaries, many of the middle-class employees will find themselves unable to maintain their status and might lose their assets built with bank loans as paying EMIs will be difficult. Besides, these assets will lose their existing inflated market prices producing a loss of wealth effect. Hence, risk of their proletarianization will increase.

Centre-State Relations & Finances

It is becoming well evident that both centre and state government finances are in dire straits and fiscal deficit is quite high because of economic crisis and doles to the capitalists through lower direct taxes and other concessions. They are finding it tough to even pay salaries to their staff and many partial salary deferments are being announced. The states are in serious difficulties as they have handed over much of their taxation rights to Centre through GST and now find their own hands tied. With regards to the devolution of taxes in the divisible pool, Centre has increasingly resorted to collect higher proportion through surcharges and cesses which are not classified as taxes and are not included in the divisible pool. Therefore, the amount of money devolving to the states by right has consistently gone down. Centre can distribute rest of the funds at its discretion based on political choices and conditions attached. On the other hand, most of the responsibility of dealing with Covid-19 and related high expenditure lies on the states. There are reports that Centre has even forced many industrialists to contribute to PM-Cares fund and not to the respective state CM’s Relief Fund. Sensing the financial difficulty of the states even the banks are lending to them at high interest rates of 7-8% for 10 years though same banks have liquid money available to them at 4.40% from RBI through Repo. Hence, states are becoming more and more dependent and beholden to centre for funds, thus constraining their capacity for political dissent and opposition to central government policies, thus making India more and more of a centralised state, leaving it federal only in name.    

Thus, the Covid-19 pandemic will further intensify the capitalist crisis, intensify cutthroat competition for survival among the capitalists, accelerate monopolisation in the economy, increase proletarianisation of petty bourgeois and elite working class, push more working-class people into unemployment and abject poverty and sharpen class contradictions. Besides, it will also exacerbate the political contradictions within the capitalist class especially the region to region and centre-state contradictions on account of the financial and economic effect of the uneven regional development under capitalism.

Originally published in The Truth: Platform for Radical Voices of The Working Class (Issue 1/ May ’20)

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