People's Democracy

Editorial

Global Financial Turbulence:

India Must Draw Proper Lessons

THE turbulence that has gripped the world’s financial markets has, once again, sharply illustrated the fact that global capitalism, a system based on the exploitation of man by man and nation by nation, can never be crisis free.  However, as repeatedly underlined in these columns, irrespective of the intensity of the crisis, capitalism never collapses on its own.  It needs to be overthrown. This requires the strength of the working class leading all exploiting classes through the sharpening of class struggle to lead the revolutionary transformation to overthrow capitalism. In the meanwhile, capitalism emerges from its self-created crisis by further intensifying exploitation. This is precisely what is happening today.

Following the unprecedented downgrading of US sovereign long term credit rating by Standard & Poor from AAA level, the world stock exchanges went into a tailspin.  In the US, the Dow Jones industrial average fell by 634 points or 5.6 per cent.  The Nikkei in Tokyo was down 3.7 per cent while the Kospi in Seoul fell 6.2 per cent.  Australia saw a fall of 2.9 per cent.  The German index, the Dax, dropped 5 per cent and has lost 21 per cent of its value since May this year.  Reflecting this, major banks saw the biggest declines in their stocks.  Bank of America fell by 20 per cent, Citi Group fell by 16 per cent, Morgan Stanley dropped by 14 per cent, J P Morgan fell by 9 per cent and Goldman Sachs fell by 6 per cent. The Standard & Poor’s 500 stock index has lost 16.8 per cent in the last three weeks.  Some stock exchanges, including our sensex, have, since, shown some improvement. This, however, may only be transitory and, in any case, such fluctuations are the reflection of the current turbulence.

These developments have virtually generated panic with the London Economist predicting a double-dip global recession led by the USA.  Last week alone saw $ 2.5 trillion wiped off from investor’s wealth.  The sensex in India lost over Rs 4 lakh crores in the last four trading sessions. The simultaneous sovereign credit crisis in the Eurozone has seen the virtual insolvency of Greece, Ireland and Portugal, who had to be bailed out by huge packages. The crisis is now threatening Spain and Italy and is unlikely to stop there. 

However, it will be wrong to characterise these developments as a new phase of the global economic crisis. In a sense this is a continuation of the financial crisis that began in 2007 leading up to a recession. This was only to be expected given the manner in which global capitalism sought to overcome the crisis that began in 2007. 

By undertaking huge and unprecedented bailout packages for those very corporates who, in the first place, caused the financial meltdown, developed countries incurred huge amounts of debts surpassing their GDPs.  Global capitalism sought to overcome the crisis by converting corporate insolvencies into sovereign insolvencies.  This, in turn, has intensified the crisis today plunging the world economy into a state of uncertainty. 

The Special Inspector General for the US government’s financial bailout programmes, created to serve as an auditor of the federal bailout, in a prepared testimony delivered to the US Congress House oversight committee says, “Since the onset of the financial crisis in 2007, the federal government, through many agencies, has implemented dozens of programmes that are broadly designed to support the economy and the financial system.  The total potential federal government support could reach upto $ 23.7 trillion.”  Compare this with USA’s GDP which is just over $ 14 trillion.  The US treasury spokesman, however, denies the veracity of this figure.

The truth, however, is that as of May 16 this year, the total US debt was pegged at $ 14.3 trillion.  Now (as noted in Prabhat Patnaik’s article last week) the USA has an anachronistic law, adopted in 1917 that puts a ceiling on the magnitude of debt in absolute terms.  This is unlike in Europe or in India where the size of the fiscal deficit (different from debt) is fixed as a percentage of the GDP. This ceiling, however, was routinely revised upwards in US history.  Given the current debt crisis, it was presumed that the tradition of this routine will continue.  However, this was not to be. 

The Republicans whose concurrence was essential to raise the ceiling demanded their pound of flesh. While insisting that the tax benefits for the rich that began during the George Bush era be continued, the Republicans put a condition for agreeing to increase the debt ceiling only if severe cuts were effected in expenditures that were essentially aimed at benefiting the poor and the needy such as Medicare.

Similar is the logic of the sovereign bailout packages offered by the IMF and the EU in the Eurozone.  Countries like Greece had to undertake  massive `austerity measures’  to cut expenditures. This has imposed an unprecedented burden on the working people, whose remunerations, amongst others, have been drastically cut. During the last two years, the popular protests in Greece have seen 17 general strikes nationwide.  Germany, widely seen as the economic powerhouse of the European Union and expected to pull other Eurozone countries out of crisis is itself showing signs of an economic slowdown. Its index of manufacturing activity dropped to 52 in July, the lowest level since October 2009. This is the third consecutive month of decline.  Analysts have said that the main source of worry for Germany is that the “sources of domestic demand are not manifesting itself”.

In other words, what is happening is the following: The capitalist State mobilises resources for huge bailout packages. In the process, it accumulates massive sovereign debt. The burden of this debt is transferred on to the shoulders of the working people through massive cuts in welfare and social security expenditures. This is the logic of capitalism, pure and simple: maximize profits by intensifying exploitation.

In the USA, data from 2009 corporate tax returns shows that the estimates of corporate profits grew from 8.3 per cent to 10.8 per cent in 2010.  Corporate profits accounted for 14 per cent of the total national income in 2010, the highest ever recorded.  Corporate profits have been expanding for the last ten consecutive quarters. In the process, all corporates have accumulated mind boggling cash reserves.  Apple alone has cash reserves of $ 72 billion, more than the GDP of half the countries in world.  Microsoft and Google together have cash reserves of more than $ 100 billion.  Similar is the story with other corporates. At the other end of the spectrum, USA has today an unprecedented unemployment rate of close to 10 per cent. 

This situation is not confined only to turbulence in global finance.  It has laid the seeds of a more fundamental crisis.  As the burden of sovereign debt is passed on to the common people, their purchasing power correspondingly declines.  Combined with the growth of unemployment, this leads to a sharp contraction in domestic demand.  Further, this global crisis has drastically reduced global trade.  Germany, for instance, saw its exports fall sharply in June to a growth rate of only 3.1 per cent compared to 20.1 per cent in May.  Under such circumstances, the manner in which the USA has handled its debt ceiling issue impacts not only its domestic economy but the global economy. With the contraction of domestic demand in all the major economic powers, save China, the contraction of GDP in all these countries is inevitable.  This, in turn, will lead to a further contraction in governmental revenues, imposing further debt. The servicing of this would lead to imposing further burdens on the people.  This vicious cycle has been set in motion, imposing unprecedented burdens and misery on the people.  This would lead to many ugly manifestations of social tension like the spreading riots of loot in the UK.

For us in India, it is important to draw the correct lessons.  Clearly, what is required is to boost domestic demand as a means for achieving not only substantial growth but also arresting the growing economic inequalities.  This would mean that the process of foregoing legitimate tax revenues in the name of stimulus packages must be reversed.  During the last two years, over Rs 9.5 lakh crores was, thus, foregone according to the budget papers.   Instead, these huge amounts should be collected and utilised for massive public investments to build our much-needed infrastructure. This will generate high levels of employment and bolster domestic demand fuelling a sustainable growth trajectory.  Further, given the global financial turbulence, India must not be foolhardy to rush into `Gen next’ financial reforms.  In the first place, if India could protect itself from the devastating effects of the global meltdown in 2008, it was because the Left parties had prevailed upon UPA-I not to proceed with such financial reforms that were waiting to be legislated. Such wisdom must prevail to protect the Indian economy and people from being devastated by this global turbulence.

(August 10, 2011)