M Aseem //
When, after the Lehman Brothers collapse, many well-meaning people thought that neo-liberal project would now retreat, it was Rahm Emanuel, Barack Obama’s Chief of Staff and former financial sector top executive who made the famous comment, “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.” He meant that all crises are actually an opportunity for ruling capitalist class to push forward its neo-liberal agenda of privatising all public assets and services and launch a renewed assault on workers’ rights to squeeze out even more drops of blood of the working class as profit for the capitalists. It is the same scenario playing out now during Covid pandemic.
When Indian capitalist economy was already in deep crisis of its own, causing untold sufferings and misery for the working class and other poor people of the country, the Covid pandemic has just thrown it into an abyss. On top of that the disaster of a completely unplanned lockdown because of Modi’s proclivity to establish his credentials as a fascist strongman by announcing sudden spectacular ‘firm, bold and strong’ decisions has caused a forced exodus of a huge number of working people from the urban industrial centres to survive by foraging for food in the very villages from where they had earlier emigrated to escape from exploitation, unemployment, poverty, hunger and casteist-patriarchal torture by the landowning kulaks. Result is the largest migration of poor people in Indian history and uncountable scenes of acute hunger, thirst, disease and death in every nook and corner of country.
In the midst of all this human suffering, a self-congratulatory and chestthumping Modi appeared again on TV screens at the widely feared time of 8 PM to annouce a 20 lakh crore rupees economic package to convert ‘calamity into opportunity’. Next day onwards Finance Minister along with her ruffian junior in tow started the daily episodes of an afternoon soap opera called Economic Package, ending in an Epilogue in the form of RBI governor appearing at his allotted slot of 10 AM. We do not intend to spend much effort here on the composition of 20 lakh crore rupee package as many bourgeois analysts have already burst that balloon by pointing out that the real value is less than one tenth of the claimed value as most of these announcements like loan schemes are either hollow not involving any real expenditure, or have already been announced several times earlier, or are nothing but old schemes, or are simply giving money already owned by x to x himself though with loud chest thumping, e.g., giving income tax refunds or 2% reduction in Provident Fund deduction from Salary. The Hindu Business Line noted on May 19, “The package, that mainly consists of loans, liquidity measures and structural reforms but very little actual spending by the Centre, is grossly inadequate to compensate for the steep ₹15-18-lakh crore loss in GDP this fiscal.”
Liquidity – Flood of Cheap Money
However we need to delve a little deeper to understand whose calamity has been converted into the opportunity for whom through this package. The government has claimed to have made historic ‘reforms’ in 4 areas of liquidity, land, labour and law. We’ll examine all four to see what these ‘reforms’ are, why such measures have been taken and whom these really benefit. Let us begin first with liquidity clubbing together the announcements by Reserve Bank governor on 22nd May in addition to those made by FM earlier. RBI Governor who was the first to give up the bravado and accept the reality of recession, i.e., negative GDP growth rate announced, among others, reduction of Repo Rate to 4% and Reverse Repo Rate to 3.35%, moratorium on loan repayments for 3 months adding to earlier one of 3 months, conversion of this 6 months’ unpaid interest into another loan and increasing the group exposure limits from 25% to 30%. FM had earlier announced government guarantee scheme for 3 lakhs crore rupees of collateral free bank loans to Micro Small Medium Enterprises. There are approximately 5 lakh crores more of such loan, liquidity and credit guarantee schemes – for NBFCs, MFIs, HFCs, MSMEs, DISCOMS, Agri infrastructure, Farmers, Food enterprises, street vendors, fishery, animal husbandry, etc details of which are not necessary here. The only tangible expenditure announced as part of this package is Rs 40,000 crores for MGNREGA, however we will need to see how much of that is really spent and when.
This has become the standard monetary response to crisis these days in all capitalist economies. In weak economic environment, their central banks try to flood the financial system with cheap money by lending to banks at a low interest rate. The hope is that the banks will lend this money further at low interest rates. This lending will help to get economic activity back on track to some extent. This, in turn, will help boost economic growth. The RBI, like other central banks, has also been trying to flood the financial system with cheap money over the last few months. It has launched several schemes to do so like long-term repo operations, targeted-long term repo operations, and targeted-long term repo operations 2.0. The schemes launched by the RBI lend money to banks at the repo rate, so that they can lend further. The repo rate is the interest rate at which the RBI lends to banks. It was at 5.15 percent and was cut by 75 basis points to 4.4 percent on March 27 and has now been further cut to 4%. All this is intended to get banks to lend.
Role of Interest Rates in Capitalist Economy
However, here we need to understand the role of interest rates in a capitalist economy. Interest rates only decide how much share of total profit industrial capitalists hand over to financial capitalists who loan money to them, and similarly how much of this shared will be passed on by the financial capitalists to the smaller bourgeoisie like middle class who have some amount of money capital but not enough to become industrial capitalists themselves and hence lend it for use to industrial capitalists through the mediation of financial capitalists. Interest rates, therefore, are not the cause of level of economic activity but its effect. Hence, interest rates do not play an important role in resolving capitalist crises.
There are also a few other things that the RBI has done to get banks to lend more, including cutting the cash reserve ratio from four percent to three percent. Banks need to maintain a certain proportion of their deposits with the RBI. When this rate is reduced, banks have more money on their books to lend. The cut from four percent to three percent was expected to add Rs 1.37 lakh crore to the financial system, which banks could then lend out.
To cut a long story short, the RBI has been trying to flood the system with more money, drive down interest rates, and get banks to lend more. But is that really turning out to be the case? The answer is no. In fact, the banks have no liquidity problems. They are flush with money and are depositing it with RBI itself at reverse repo rate of only 3.35%, weekly average being more than 8 lakh crore rupees. Hence, liquidity is not really the problem here.
The purpose of capital investment in capitalist economy is not production but to convert it back into money capital by selling the produced commodities so that the surplus value produced by employing labour power, the source of all profit, can be added back to initial capital, thus accumulating higher level of capital after each production cycle. The repayment of interest on bank loan capital is also done out of this profit generated from business operations. That cycle of capital was already under strain by the economic crisis and now has been further broken by the lockdown. Hence, neither there is any demand for loans nor capacity to repay loans already taken. On the other hand, banks are also not willing to lend as they are wary of which companies will survive this crisis and which will not. The fact is RBI has had to grant moratorium of 6 months on payment of all loans and the accumulated interest payments of these 6 months will be considered additional loan to the borrowers. Hence it is going to further increase their debt burden. As per the data coming into public domain in some smaller banks up to 90% of borrowers have opted for moratorium meaning there is sever constraint on money generation in the businesses. This is also corroborated by the fact that the government has suspended the operation of its bankruptcy mechanism for a period of 12 months so that bankrupt firms will no longer be declared for next year. Similar relaxation has been announced for recognising many overdue loans as non-performing assets.
The other intention of driving down interest rates is to motivate middle class savers to buy more as the negative real interest rates (rate of inflation higher than interest rates on bank deposits) makes bank deposits loss making while loans are available on cheap interest rates. However, that was possible only in US and Europe when capitalist economy was relatively stable in post-world war period and some modicum of social security was available as capitalist class was able to give a little share of surplus to the middle class. However, with intensifying capitalist crisis insecurity created by massive unemployment and declining real incomes have removed that factor. Moreover, middle class is already overburdened by housing, car, consumer loans which are now becoming tough to repay. Besides, value of their savings in bank deposits, Small Saving Schemes, PF, Insurance, MFs, etc are effectively becoming less as interest rates are expected to be slashed across the board. Hence, driving down interest rates will not increase the demand in the economy as these sections will now be forced to save more.
Similar is the case of decisions like the reduction of rate of the tax deducted at source, reducing the rate of Employee Provident Fund (EPF) deduction and accelerating Income Tax refunds. While these do put more money briefly in the hands of some people and businesses, it doesn’t reduce the tax outflow or increase the real income in any way. For example, the government estimates that the move to reduce the rates of tax deducted at source and tax collected at source, will increase the liquidity in the financial system by Rs 50,000 crore. But this is basically money which will continue to be in the hands of people for a slightly longer duration, until they pay their full and final taxes on this income. How can this be a part of a package or an economic stimulus as the media is calling it?
More Loans – More Bad Loans
So, what will these loan schemes expected to achieve? One thing that the collateral free loans with government guarantee is expected to do is that many capitalists will avail of these new collateral free loans, risk free for them, and retire the old ones with collateral. When and if the new loans become NPA, the government guarantee will come into picture and the burden of that will be borne by common people through more indirect taxes, higher fees/prices of public services and curtailment of expenditure on social services, etc.
Thus, all this liquidity and administrative measures are just hiding a lot of stress in the economy under the carpet and trying to avert bank failures because of payment problems. India Ratings estimates Rs 5.5 lakh crore worth slippages to be added to bank balance sheets in FY21 owing to Covid-19 stress and outstanding gross bad loans for listed banks could rise from Rs 9 lakh crore to over Rs 14 lakh crore in FY21. Similarly, Centre for Monitoring Indian Economy (CMIE) CEO has commented, “Centre’s package doesn’t solve problem, only creates more NPAs.”
Structural reforms – Privatisation & ‘Ease of Doing Business’
Next we come to what government dubbed as ‘structural reform’ measures but, in fact, are more neo-liberal policies to further privatise, liberalise and integrate Indian economy to world capitalist economy. FM Sitharaman herself clarified that Atma Nirbhar Bharat Abhiyan is not about making India isolated. Hence ‘Structural policy reforms in growth-oriented sectors’ has liberalised these crucial sectors for ‘more investment, higher production and more jobs opportunities.’ The eight sectors are – coal, minerals, defence production, air space management, airports, Maintenance Repair Operations (MRO), distribution companies in Union Territories, space sector and atomic energy. FM announced to make the air travel cheaper and to make civilian flying ‘more efficient’ and ease the restrictions on utilisation of the Indian Air Space. The government also announced the commercial mining in the coal sector and informed that the government’s monopoly will be removed to make coal available on market prices. Government will also spend 50 thousand crore rupees to create infrastructure for private coal mining. Further, FM Sitharaman said that Discoms in metros will be privatised. In the space sector, the government will boost private participation in space activities and will also provide a predictable policy and regulatory environment to private players. The government will bring in policy reforms to fast-track investment; project development cell in each ministry to prepare investible projects, coordinate with investors and central/state governments. Under upgradation of industrial infrastructure, the scheme will be implemented in states through challenge mode for Industrial Cluster Upgradation of common infrastructure facilities and connectivity. The government has increased the FDI limit in defence manufacturing under the automatic route from 49 per cent to 74 per cent. In the name of economic package for Covid the policy to allow private cos to participate in inter-planetary space travel or use ISRO facilities, pandemic would become a blessing for private sector biggies who have been eyeing ISRO assets for long. Similarly, FM announcements related to coal, aviation, power sectors will suit Adani Power, Tata Power, JSW Energy, Reliance Power, Vedanta, etc who will lock horns in the bid for thermal coal blocks and other projects in power and aviation sectors.
VGF – A Gift for Private Capital
Along with this FM also announced a Viability Gap Fund (VGF) of Rs 8100 crores for privatisation in Social Sectors. And immediately followed NITI Aayog missive to Chief Secretaries of all States, “Accelerate process of setting up of medical colleges on PPP model & augmenting district hospital facilities with private partners. Use VGF route available for social sectors.” So now government is not even going to sell public sector assets to private capitalists to garner some funds to meet its budgetary deficit. It is actually going to fund 30% of the project cost of taking over control of existing district hospitals because, in their view, private sector is doing a public service by taking over public hospitals and they should be given money to ensure minimum level of profits! Rs 8100 crores is going to be handed over to them in this manner.
Besides this package the government has committed to go ahead with the much touted ‘labour law reforms.’ What these labour reforms will be can be well understood by the measures already being taken by various state governments ruled by both BJP as well opposition parties, viz, 12 hour working day, doing away with all labour law requirements for protection of workers like sanitation, security, safety, lunch and rest breaks, creches, etc and full freedom from any inspection for these. Then there is also full ban on strikes using Essential Service Maintenance Act. Without going into details as this is discussed in detail separately in this issue, it can very well be said that capitalist class is no longer satisfied with extraction of just more and more relative surplus value and they want to also extract more absolute surplus value through increasing the length of the working day and reducing non-wage expenditure on workers. This is happening in an environment where Labour costs account for only a relatively small proportion of total industrial costs in India. According to Annual Survey of Industries, in 2017-18, wages to workers were less than 3% of total input costs for India as a whole; in UP they came to 2.6 % and in Gujarat & MP only 2%. Hence, reality is that organic composition of capital (ratio of constant capital to variable capital) in India has increased to so much extent that whatever the rate of relative surplus value, surplus value per unit of capital employed is going down leading to falling rate of profit.
On the other hand, government has withdrawn its own order of paying lockdown period wages to workers announced earlier. Industry had said it would lead to closure of MSMEs without the government’s support on wages. The economic package didn’t give companies wage support through grants, except to some small and formal sector companies by footing their employees’ provident fund dues. What to say of private sector even government itself and public sector institutions were not doing so. But there were some cases of unions giving legal notices for this, e.g., in IIM Ahmedabad. Therefore, the government has cancelled the order itself. This is in a catastrophic scenario where 14 crore workers have lost their jobs since March and unemployment rate has gone to an unprecedented 26% according to CMIE database, though it does not give the complete picture as this captures unemployment rate only in members of labour force, i.e., those who are employed or actively looking for one, whereas in India large number of unemployed, having lost all hope of finding a job, have simply gone out of the labour force and labour force itself has gone down to 36% of the working age population.
The move to finance the EPF contributions haw left behind majority of workers as it covers only about 16 per cent of the total EPF subscribers and 1.6 per cent of the total workforce of 471 million in India. Now the Government may soon allow firms to delay EPF contributions or pay these in instalments Government may also expand the scope of subsidising EPF contributions for firms. EPFO CEO has also told firms they needn’t pay EPF contributions over basic pay of Rs 15,000. Hence, relatively better paid workers might also lose matching employer contributions to PF beyond level of salary.
Legal & Regulatory Changes
Besides labour law changes, Government is also promising to amend many more laws and regulations as enablers to increased ease of doing business. First, operation of Indian Bankruptcy Code (IBC) has been suspended for one year. 2nd, Agriculture Products Marketing Committees (APMC) Act is to be amended allowing farmers to sell their produce anywhere in the country. This will benefit rich farmers or producer companies who will be able to buy at low prices from distress selling small and marginal peasants and sell directly to the urban consumers where they can get higher prices. 3rd, the revised thresholds announced by Finance Minister for classifying industries as MSMEs will result in a higher number of businesses qualifying for the safeguards under the MSME law. 4th, under the many funds/loan schemes announced for agriculture and agro-industries like beekeeping, fishery, dairy, forestry, farmgate infra, etc government intends to push for more formalisation in agriculture sector of the economy and to integrate it more tightly in the capitalist market economy. 6th, another major announcement is restricting Public Sector to yet to be announced strategic sectors and allowing private sector to operate throughout the economy. PSUs outside these ‘strategic’ sectors will be merged or privatised.
FM has also announced many relaxations on legal compliance to corporates. The governance standards for listed companies under company law will no longer be applicable to private firms. However, we know these private firms are mostly owned by same promoters as the listed companies and work in tandem with them. The fact is most corporate frauds are done through related party transactions between public and private firms of same promoters. Moreover, many violations of company law will no longer be treated as criminal acts saving many capitalists from punishments for their crimes.
Why Such A Package?
Such a package announced with much fanfare but without incurring any real expenditure shows the desperation of the heavily crisis ridden government. Goldman Sachs has already said that India will have its deepest ever recession & the structural reforms announced by the govt in lieu of an immediate stimulus package, will fail to have any effect in short term on reviving the economy. It is predicting a 45% slump in India Q2 GDP. “Our estimates now imply that real GDP falls by 5 per cent in FY21 (vs -0.4 per cent in our previous forecast). The minus 5 per cent growth we forecast for FY21 would be deeper compared to all the ‘recessions’ India has ever experienced,” the report added.
In such a situation, government revenues will go down sharply and fiscal deficit will jump sky high. With both central and state government borrowing limits raised, PSBR or public sector borrowing requirements may surge to anywhere between 11-13% of GDP. This is well above household financial savings currently 9%. According to reports dated 9th May, “The government plans to borrow Rs 12 lakh crore ($160 billion) in the fiscal year to March 2021, up from the previously budgeted Rs 7.8 lakh crore to cushion the blow from the new coronavirus pandemic.” Hence Government will now borrow Rs 30,000 crore via sale of bonds each week, sharply higher than the Rs 19,000-21,000 crore scheduled earlier. Since this goes against the intention of driving down interest rates, much of this is expected to be financed by RBI by money expansion or so-called printing of notes. RBI currently is not doing it directly but through Primary Dealers in government securities who are buying these in sales and are then reselling to RBI in Open Market Operations. This is expected to increase the debt-GDP ratio of government from 70% to anywhere beyond 80% which is going to be tough to service in a scenario of negative nominal GDP growth. Hence, central and state governments are not able to incur any more expenditure, they have to rather go for austerity.
Neo-liberalism – Broad Consensus in Capitalist Class
There are many well meaning people, some even among the left circle who believe that this crisis is the end of neo-liberal economic policies but as seen above the ruling capitalist class is not going to cease neo-liberal attack but will rather intensify it using this pandemic as an opportunity. And this view is not just restricted to the ruling BJP but there seems to be broad consensus on this among the whole spectrum of the bourgeois political forces as is apparent from labour law and other changes in Rajasthan and Punjab ruled by Congress. Moreover, economists like Raghuram Rajan, Gita Gopinath, Arvind Subramanian, Abhijeet Banerjee, etc not directly aligned with ruling party and some of them hobnobbing with opposition Congress are also advocating the same as is evident by their interviews and statements in media. One interview of Raghuram Rajan to The Wire stands out in this respect and we are quoting some of it below.
“Rajan said the financial sector has been in deep distress for a long while before this crisis struck. It needs restructuring, recapitalisation and we must plug the hole in the leaking bucket. He explicitly called for better quality management of public sector banks. Asked about the reforms the Central government or state governments have announced, Rajan said he agreed that the agricultural reforms could be game-changers, similar to the end of the licence-permit raj in industry, but they needed to be fully and honestly implemented.
Rajan said he welcomed the reform restricting PSUs to a yet-to-be-defined strategic sector and permitting the private sector to function across the economy but was worried that the necessary privatisation this entailed might never happen. He pointed out that only a fraction of the privatisation committed to in any budget has actually happened and, anyway, a lot of it was sale from one government owned entity to another.
Rajan told The Wire whilst a lot of the labour reforms announced for three years by the governments of Uttar Pradesh, Madhya Pradesh and Gujarat were long talked about and perhaps needed, they should not be done with the stroke of a government pen. Such steps needed wider consultation otherwise they could provoke protests on the streets. He also added that such reforms cannot be done for just three years. Industry needs a credible assurance of permanency. Rajan said there was a need to ease factor markets like land, labour and finance. He also spoke of the need to further push ease of business.”
To conclude, expectation that human misery and suffering caused by economic crises and pandemics can induce capitalists to adopting more humane policies is not to understand at all the fundamental nature of capitalist society. Driven by maximisation of profit it is bound to increase its neo-liberal onslaught whatever the damage to human life. Neo-liberal policies can only be reversed by working class overthrowing the capitalist economic system itself.
Originally published in The Truth: Platform for Radical Voices of The Working Class (Issue 2/ June ’20)