The Context Post-independence India was one of the classic cases of - PowerPoint Presentation

1. The ContextPost-independence India was one of the classic cases of dirigiste- i.e., state-directed economic development. Not only the state was highly interventionist, but the economy came to acquire a sizable public sector, especially in areas of infrastructure and basic industries.The “mixed” economy that thus came into being, together with the fact that the polity was characterized by multiparty parliamentary democracy with a largely free press and significant freedom of expression, invested the Indian experiment with a novelty and uniqueness, which attracted worldwide attention and gave rise to a vast theoretical literature on development planning.

2. Broad Outlines of the Programme of Structural Adjustment India’s transition in 1991 to a programme of “structural adjustment” which entails a regime of “liberal imports”, a progressive removal of administrative controls, including a move to “free markets” in foodgrains and a whitling down of food subsidies, a strictly limited role for public investment, the privatization of publicly owned assets over a wide field, an invitation to multinational corporations (MNCs) to undertake investment in infrastructure under a guaranteed rate of return and financial liberalization that would do away with all priority sector lending and subsidized credit, is an event of great historical significance.

3. International Conjuncture and Accentuation of Contradictions Underlying this transition is a changed international conjuncture on the one hand and an accentuation of the contradictions of the dirigiste regime in the other.Though the transition could have been avoided by an alternative strategy, according to some scholars, but the changed conjuncture did prepare the soil for “structural adjustment”. It would be worthwhile to discuss here the changed international conjuncture underlying the role of Bretton Woods institutions, which has been vital.

4. The Role of IMF and the World BankTraditionally, there have been significant differences between the International Monetary Fund (IMF) and the World Bank. But these have narrowed over time, and the reasons for this narrowing constitute an important element of contemporary political economy.The Bank has always been opposed to any attempts on the part of the Third World countries to break away through conscious design (which necessarily means conscious state intervention) from the pattern of international division of labour inherited from the days of colonialism and semi-colonialism. If such a break is to be achieved, then it must be achieved entirely through the mediation of market forces. The Bank has remained absolutely faithful to this position of opposing state- sponsored industrialization.

5. Changes in the BankWhat has changed in the case of the Bank over time is, first, the specific argument used by it for opposing state-sponsored industrialization; secondly, the precise tactics it has brought to bear in order to undermine state-sponsored industrialization in Third World countries; and thirdly, the precise package of programmes around this basic objective.These changes reflected the changing nature of world capitalism.

6. Bank’s Policy in Historical PerspectiveIn the late fifties and the early sixties the Bank used a macro argument to push its line: substantial unutilized capacity in the industrial sector existed because of a scarcity of foreign exchange; a combination of import liberalization and exchange rate devaluation therefore would set up a virtuous circle of “more imports- more capacity utilization- more exports- still more imports” and so on, which would unshackle the economy from the clutches of dirigisme.This was the argument on the basis of which the World Bank pushed the Indian government into adopting an import-liberalization-cum-devaluation package in 1966, with disastrous consequences.

7. Bank’s Change in its TacticsWhere the World Bank did change was in two respects: the first relates to its tactics.In the beginning up until the end of the fifties in the case of India, the Bank studiously avoided giving any loans for government programmes.In the early sixties it modified its stance to give loans for social infrastructure projects, but not for any public sector industrial undertakings.It is only when the policy of boycott of public sector undertakings appeared to be counterproductive from its points of view that it started financing investment in such undertakings but with its own conditionalities, such as global tendering, specifying technological details and the scale of plants, etc.

8. Bank’s Change… (contd.)This shift from “ boycotting” to “infiltrating” the public sector enabled it to exercise great leverage to induct MNCs directly into the public sector as collaborators, to undermine domestic technological self-reliance and indigenous technological capabilities, to dictate pricing policies and acquire an indirect say on the government budget.This shift also enabled the Bank to set up “networks” with bureaucrats and managerial personnel of the public sector. Together with this began the process of World Bank employees shifting to key government positions, especially in the Ministry of Finance, even as they were drawing pensions from the Bank, or even as they kept open the option of moving back to the Bank. They provided a powerful lobby working in concert toward “liberalization-cum-structural adjustment.”

9. Bank’s Insistence upon Financial Sector Reforms The other respect in which the Bank did change was in its new insistence upon a range of financial sector reforms whose overall objective again was to detach the domestic financial institutions and the financial markets from their integration into the domestic development effort (through, for example, low long-term interest rates, subsidized credit, and the allocation of a minimum share of credit disbursements for “priority sectors” such as agriculture, etc.) and to integrate them more closely instead with global financial markets.

10. A Fundamental Change in World CapitalismThe widening of the Bank’s package, from simply rolling back state-sponsored industrialization through a removal of trade restrictions, government controls, and the preeminence of the public sector, to an integration of the domestic economy with the operations of global finance, reflected a fundamental change that was taking place within world capitalism itself.There was, now, a tendency toward greatly increased fluidity of finance across national boundaries, a tendency in short toward a globalization of finance, which is very different from globalization of production facilities.

11. Shift in the position of the IMFThis very tendency also explains the shift that was taking place in the position of the IMF as well. Earlier the IMF was exclusively concerned with “stabilization”. It concentrated on a few macro-level identities and made no attempts at modeling “structural adjustment.”It provided the toolkit for a highly conservative financial institution whose sole concern, especially vis-à-vis Third World countries, was to recover its loans by imposing fiscal discipline upon the latter.A major change took place between the two oil shocks. In the wake of the first oil shock the recycling of resources to the Third World was organized by the IMF itself. But by the time of the second oil shock, it was the banks that were doing whatever recycling was to be done.

12. Shift in the position of the IMF…(contd.)IMF was called upon only to provide “security cover” to the banks. So started a process: from being a leading financier the IMF had been reduced to the status of a “gendarme” of international rentier interests.As a gendarme, then, it had to insist that the countries, which were caught under its “conditionalities” and thereby became possible candidates for receiving funds from international rentiers, adopted a host of measures that were to the liking of the rentiers, such as privatization of public assets, “opening up” of financial markets, removal of exchange restrictions, convertibility of the currency on the current and capital accounts, and so on.All of these measures amounted to an espousal of the kind of “structural adjustment” that the World Bank had also come around to.

13. Shift in the position of the IMF…(contd.)To sum up, while the conservatism of the Bretton Woods institutions has continued unabated, there have been major changes in the precise texture of this conservatism, reflecting changes that have been occurring in world capitalism.So the IMF and World Bank have not only come together in terms of outlook, but this coming together has itself been promoted to a significant extent by the vastly enhanced role of globalized finance.Such ascendancy of globalized finance has been responsible, to a major extent, for keeping down what Lenin would have called “inter-imperialist rivalry”, certainly as far as the Third World is concerned. The governments of the advanced capitalist countries present a remarkably common front and give more less unanimous support to the structural adjustment measures being imposed by the Bretton Woods institutions.

14. Contradictions of the Dirigiste RegimeThis phenomenon of financial globalization was bound to affect the domestic economy, sucking domestic wealth holders into its vortex and in the process undermining the viability of the dirigiste alternative.For any state intervention to be even remotely effective, it is essential that there be some “control area” within the domain of the state over which it can ensure a degree of correspondence between the intentions behind its policy actions and their outcomes.If finance can flow in or flow out in response to pressures emanating from abroad, if the domestic wealth holders’ behaviour defies the very concept of a “control area” under the domain of the nation-state, then the possibility of state intervention gets eroded.

15. Contradictions…(contd.)As stated earlier the changed international context was not alone responsible for the eventual transcendence of the dirigiste regime. The regime had serious internal contradictions that contributed to an erosion of its social stability as well as of its economic viability, and propelled it toward a situation where it could not summon the will for any alternative viable responses to the changed context that has already been underscored.The economic policy regime erected in the 1950s had its roots in the freedom struggle itself. The economy had been dominated by metropolitan capital and metropolitan commodities in the pre-independence period.

16. Contradictions…(contd.)Freedom meant freedom from this domination, and this could not be ensured without giving the state in independent India a major role in building up infrastructure, expanding and strengthening the productive base of the economy, setting up new financial institutions, and regulating and coordinating economic activity.This was necessary for building capitalism itself, though Nehru had his ideological conviction and commitment to achieve socialism. Three mutually reinforcing and interrelated contradictions need to be noted.First, the state within the old economic policy regime had to simultaneously fulfill two different roles that were incompatible in the long run. On the one hand it had to maintain growing expenditures, in particular investment expenditure, in order to keep the domestic market expanding. Reasons:

17. Contradictions…(contd.)The absence of any radical land distribution had meant that the domestic market, especially for industrial goods, had remained narrowly based socially.It had also meant that the growth of agricultural output, though far greater than in the colonial period, remained well below potential.Under these circumstances, a continuous growth in state spending was essential for the growth of the market. At the same time, however, the state exchequer was the medium through which large-scale transfers were made to the capitalist and proto-capitalist groups. In other words, the state was an instrument for the “primary accumulation of capital.

18. Growth in Government’s Revenue Deficit and Fiscal DeficitThe contradiction between these two different roles of the state manifested itself (despite increasing resort to indirect taxation and administered price hikes) through a growth in the government’s revenue deficit.A result of course was that the fiscal deficit also went up. This, however, reflected not a step-up in public investment but a decline in public savings. The revenue account of the central government-1950-60-was in surplus; in the 1970s-went into a deficit; this deficit climbed steadily from Rs. 20,370 million in 1980-81 to Rs.105,140 million in 1988-89; Rs. 119, 140 million in 1989-90; and Rs. 185, 610 million in 1990-91.

19. The Implications of this Growing Fiscal CrisisThe implications of this growing fiscal crisis were obvious: the government had either to cut back the tempo of its investment or to maintain this tempo through increased recourse to borrowing. If the borrowing is from abroad, then the building up of pressure for a change in the policy regime is obvious.The state would sooner or later have to cut back its expenditure, especially investment expenditure, which would slow down the economy and eventually arouse capitalists’ demands for an alternative policy regime. In short, the regime gets progressively engulfed in a crisis.

20. The Second ContradictionIt lay in the inability of the state to impose a minimum measure of “discipline” and “respect for law” among the capitalists, without which no capitalist system anywhere can be tenable. Disregard for the laws of the land, especially tax laws, was an important component of the primary accumulation of capital.The third contradiction had its roots in the intellectual ambience of an ex-colonial society like India. The market for industrial goods was from its very inception, as we have seen, a narrowly based one socially.Capitalism in its metropolitan centres, however, is characterized by continuous product innovation, the phenomenon of newer and ever newer goods being thrown into the market, resulting in alterations of lifestyles.

21. The Third Internal ContradictionIn an ex-colonial economy like India, the comparatively narrow social segment having additional purchasing power whose growing consumption provides the main source of the growth in demand for industrial consumer goods, is also anxious to emulate the lifestyles prevailing in the metropolitan centre.It is not satisfied with having more and more of the same goods that are domestically produced, nor is it content merely with expending its additional purchasing power upon such new goods as the domestic economy, on its own, is capable of innovating.Its demand is for the new goods that are being produced and consumed in the metropolitan centers and which, given the constraints upon the innovative capacity of the domestic economy, are incapable of being locally produced purely on the basis of indigenous resources and indigenous technology.

22. The Third Internal…(contd.)An imbalance therefore inevitably arises in such economies between what the economy is capable of locally producing purely on its own steam, and what the relatively affluent sections of society who account for much of the growth of potential demand for consumer goods would like to consume.The result is a powerful buildup of pressure among the more affluent groups in society for a dismantling of controls.The slower expansion of public investment also meant a slower growth in the productive potential of the industrial sector on account of the resulting infrastructural constraints.

23. Bleak Export Prospects of Indian CapitalGiven the sluggish growth of the home market, breaking into export markets could have provided a new stimulus to industrial expansion and a new basis for capital accumulation in productive channels.But export markets were dominated by metropolitan capital. Thus, the export prospects of Indian capital consequently remained bleak.Support for Fund-Bank-style liberalization was growing not just among a section of capital. A whole new category of an altogether different kind of businessperson was coming up, who was more in the nature of an upstart, international racketeer, fixer, middleman, often of “nonresident Indian” origin or having nonresident Indian associations, often linked smuggling and the arms trade.

24. Growing Support for Fund-Bank-style LiberalizationThe new businesspeople in any case did not have much of a production base, and their parasitic intermediary status as well as the international value of their operations naturally inclined them toward an “open economy.”And finally, one should not exclude a section of the top bureaucracy itself, which had close links with the Fund and Bank, either as ex-employees who might return any time to Washington D.C., or as someone engaged in dollar projects of various kinds, or as someone having some other aspirations. The weight of this section in the top bureaucracy had been growing rapidly, and its inclination naturally was in the direction of the Fund-Bank policy regime.

25. Concluding ObservationsThus, quite apart from the growing leverage exercised by the international agencies in their capacity as “donors,” the internal contradictions of the Nehruvian dirigiste policy regime generated increasing support within the powerful and affluent sections of society for changing the regime in the manner desired by these agencies.