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Casino Capitalism in the Making?

ECONOMIC AND POLITICAL WEEKLY Casino Capitalism in the Making? High finance, or international capital, would certainly be very comfortable if prime minister Manmohan Singh

April 1, 2006 ECONOMIC AND POLITICAL WEEKLY
Casino Capitalism in the Making? High finance, or international capital, would certainly be very comfortable if prime minister Manmohan Singh’s government disassociates itself from the democratic political process. International capital has no respect for the notion of accountability to the people; the process of financial liberalisation can best be steered sans that notion. Indeed the democratic process and accountability are obstacles to the spread of high finance. The National Common Minimum Programme makes no mention of making the rupee fully convertible on the capital account. That, however, did not prevent the prime minister from flagging this extremely important and controversial policy proposal at Mumbai on March 18 (even as Parliament was still in session), when he asked the Reserve Bank of India to revisit the issue of full convertibility of the rupee. This major initiative comes nearly a decade after the Tarapore Committee-I submitted its 1997 road map on convertibility. That report, which recommended (provided certain preconditions were met) that the rupee be made convertible by 1999-2000 was, fortunately, given an unofficial burial in the wake of the east Asian crisis of 1997-98. The perils of convertibility were so obvious in the late 1990s that even the International Monetary Fund was forced to abandon a major proposal to amend its Articles to promote capital account convertibility in the developing countries. Of course, since the early 2000s, the RBI has been taking small as well as large steps to relax capital controls for both foreign investors and domestic economic entities. The RBI has lost no time in announcing the setting up of a new committee under the chairmanship of the former central bank deputy-governor S S Tarapore to produce a new road map to convertibility as quickly as before July 31. The composition of the Tarapore Committee-II is almost entirely the same as in 1997, and while all the members are eminently qualified and experienced economists, market participants or commentators, it must be pointed out that the committee has no representation of an alternative or critical viewpoint. A recommendation of Tarapore-II to move earlier rather than later to capital account convertibility can therefore be taken for granted. (Considering that more than 150 Indian economists have since issued a statement against the initiative of the government and the RBI, there is no shortage of an alternative perspective that would have surely enriched the deliberations of the committee.) Make no bones about it; the rendering of the rupee fully convertible on the capital account, if Manmohan Singh does eventually manage to blunt the left’s opposition, would be the climax to a process, which began in 1991. Globalisation, in its present phase, has shaped a new political economy. While governments still need to be responsible to the electorate for macroeconomic performance in terms of employment, inflation, the balance of payments and economic growth, there has been a relative shift in the importance of the global compared to the home market. And, the high mobility of the massive volumes of global financial capital has obliged governments to play safe – avoiding any policy measures that may offend and catalyse the flight of finance capital. Hence, even in the face of agrarian distress, persistent poverty and high underemployment and unemployment, the government of India has been austere with respect to public expenditure, while the RBI has been cautious and restrictive in its stance on monetary policy. Shortterm global financial flows have severely constrained the government’s economic policies. The powers that be – whether the Congress or the Bharatiya Janata Party – have already made India a tax haven as far as listed equity capital is concerned. This along with other measures (such as the easing of equity capital caps for foreign institutional investors, giving hedge funds a freer rein, permitting “sub accounts” and the derivative instrument of the “participatory note”) have led to an unprecedented inflow of portfolio finance and a consequent boom, nay bubble, in the stock and real estate markets.

Manmohan Singh, union finance minister P Chidambaram and their economic policy advisors think that this relatively large inflow of what is essentially footloose global finance is an unmixed blessing for the Indian economy and the people. (Of course, for the foreign investor the rupee is for all practical purposes already convertible on the capital account, a further relaxation will permit more Indian companies and banks to lend, borrow and move capital to and from the global financial markets.) Sure enough, the inflow of funds, buttressed further by capital account convertibility, can artificially sustain for a while the huge and expanding import surplus and current account deficit. But a Keynesian macroeconomic analysis will show that this will have a “contractionary” tendency upon aggregate demand and overall economic activity. No doubt, imports do relax supply-side bottlenecks, but in the context of large financial capital inflows a significant part of imports may be exogenous, that is, not induced by income. One can argue that large inflows of capital can also stimulate investment and exports, but the marginal propensity to import out of the inflow may exceed that out of investment and exports. In any case, when the inflow of finance capital exceeds the current account deficit, the consequent accumulation of foreign exchange reserves induces a tendency towards appreciation of the rupee. Given high import and export elasticities, the current account deficit may indeed widen further, with a further contractionary tendency on aggregate demand and overall economic activity. One has only to bring in the role of expectations regarding the exchange rate and asset prices (financial and real estate), speculation and irrational exuberance, and we have a recipe for an eventual financial crisis, leading to an economic and human disaster.

With capital account convertibility, the ascendancy of finance capital (propelled by speculation) over industrial capital (driven by enterprise) in India will be complete, holding out the real threat that sooner or later Indian capitalism will degenerate into a form of casino capitalism. EPW

Economic and Political Weekly April 1, 2006

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