A. Inadequate/misleading explanations for foreign capital’s opposition to Government spending
B. The real reasons for foreign investors’ opposition
C. Examples of how foreign finance makes use of a crisis in weak and subordinate countries
D. India’s credit boom and bust
F. The restructuring has already started
Endnote: Financial crisis as opportunity for foreign investors
Summary
The standard explanations given for foreign investors’ opposition to Government budgetary spending in India (namely, that foreign investors are worried about inflation, or that they are worried there will be runaway growth of Government debt) are unconvincing. An additional explanation, that foreign investors oppose Government spending due to their neoliberal ‘ideology’, is inadequate: the same foreign investors embrace government spending in their home countries whenever it suits their own interests, such as when the government there bails out the financial sector during each crisis.
The real reason for foreign investors’ systematic opposition to Government spending in countries like India is that, when such spending is suppressed, private investment is the ‘only game in town’. In such a situation, private investors are able to extract various concessions from the Government to induce them to invest. Further, during a regime of fiscal cuts, the Government carries out so-called ‘reforms’ in favour of big capitalists; and it sells off valuable public assets at distress prices in the name of bridging the fiscal deficit. These are major windfall gains to private capitalists, and in crisis periods foreign capitalists are best positioned to take advantage of these opportunities. Further, the lack of Government spending aggravates the paucity of demand in the economy, and pushes a large number of domestic private firms to sell off their assets at depressed prices; foreign investors, relatively flush with funds from the economic stimulus packages in their home countries, are able to step in and buy prize assets very cheaply. The crises suffered by South Korea, Thailand, and Greece are striking illustrations of this process (see Endnote).
In India, there is an endemic paucity of demand, due to the stultifying basic features of India’s political economy, and these will not change under the existing set-up. Given this constraint, episodes of rapid growth take place only when there is some special stimulus; and they also peter out rapidly. India’s rapid growth of 2003-08 was actually a credit boom, or bubble, produced by large inflows of foreign finance. The boom, and the prospects of rapid accumulation of wealth, also whetted the appetite of large Indian capitalists to grab public assets, subsidies, and natural resources; one way of doing so was through public-private partnerships (PPPs). These PPPs were funded by public sector banks, and diversion and fraud by private investors were rampant.
With the Global Financial Crisis, there was a sudden stop to capital inflows, a credit freeze, and general uncertainty, and of course growth slowed. Initially, the Government had a clear go-ahead from the leading capitalist countries to revive growth by expanding spending, which enabled it to recover by 2009-10. However, once global finance had found its feet again, it applied pressure for fiscal cutbacks in Third World countries like India.
Given India’s underlying problem of demand, and given the deflation of the bubble-growth of 2003-08, the only remaining means of stimulating growth could have been Government spending and, to a lesser extent, easing credit (by reducing interest rates and other measures). However, both weapons were slowly surrendered in the post-2010 period. The Central government brought down its spending/GDP ratio sharply. The country’s central bank, the RBI, adopted a one-point objective of bringing down inflation, and went about doing so by, in effect, deflating the incomes of working people.
In the earlier period, i.e., 2003-10, bank credit to the private corporate sector had swelled massively as large capitalists expanded at breakneck speed. Once the bubble burst, the corporate borrowers began defaulting on their loans, which became non-performing assets (NPAs). The private corporate sector turned to massive external commercial borrowings, ignoring the risks. (Meanwhile small and medium firms were starved of credit, and faced repeated blows from Government policies, so that they began shrinking.)
The growing contradiction between foreign liabilities and a weakening economic base must at some point end in either of two resolutions: the repudiation of the foreign liabilities (which is not on the cards in the existing social order); or the transfer of domestic assets to foreign capital. The RBI’s tightening of norms for recognising bad debt, and the introduction of the Insolvency and Bankruptcy Code, were important steps on the second course.
Thus, as a result of the private corporate sector’s debt-spree followed by a long period of stagnation/decline in productive activity, a major restructuring of the Indian economy is on the cards: Labour being restructured in favour of capital; small firms being restructured or destroyed in favour of big capital; the public sector being cannibalised by private capital; and the domestic economy as a whole being restructured in favour of foreign capital.
This process is already under way. Assets of the private corporate sector are being taken over by foreign investors on a sizeable scale, and the present sharp downturn of the economy is likely to speed up this process. This takeover will carry with it all the negative features of the iniital projects, but will have added negative features of foreign ownership.
The privatisation programme itself is an even more audacious annexation of national assets by foreign capital as well as by large Indian firms. The manner in which the Government is proceeding to sell off one of its most precious assets, the highly profitable petroleum refining and marketing giant BPCL, is a harbinger of what is to come. The Government has announced that it plans to hawk virtually all public sector assets in the coming period. As elsewhere worldwide, these sales will necessarily be at distress prices, thereby ensuring the ‘success’ of the privatisation programme.
There is a peculiar but significant feature of India’s version of the austerity-driven asset-stripping programme. Elsewhere, the native rulers have almost always dragged their feet, refused at first to submit to certain clauses, even put up a temporary show of defiance. This is because almost all such countries are marked with political turmoil as people resist their country’s subjugation and expropriation. However, in India, the rulers themselves have come forward aggressively with the package of austerity and ‘reforms’ as their own. Even more outlandishly, they have promoted it as ‘self-reliance.’
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For three decades now, the IMF, and now the foreign credit ratings agencies, have warned the Indian government about the size of its ‘fiscal deficit’ (i.e., the sum of all borrowing by the Government in a given year), and called for Government spending to be reduced. They continue to raise the alarm in the midst of the present grave crisis. Why do foreign investors in India oppose an expansion of Government spending?
There are several intertwined reasons for this. Before we present our own view, let us first address some of the explanations usually given, which are misleading or partial.
A. Inadequate/misleading explanations for foreign capital’s opposition to Government spending
- “Foreign investors are worried about inflation.”
No doubt, foreign investors are in general worried about inflation in India (and countries like India). Inflation, they fear, would cause the rupee’s exchange rate to the dollar/euro/yen to fall. This would wipe out part or all of the financial gains made by foreign investors on their Indian investments, when they convert back to the dollar or other international currencies (see footnote[1] for an explanation).
However, with overall demand for goods collapsing today, even the Government’s chief economic advisor acknowledgesthat there is no generalised threat of inflation, rather that there is instead a threat of deflation, i.e. falling prices, due to the evaporation of demand.[2] Demand is depressed because people do not have money to spend; so much so that, even though the supply of many commodities is disrupted or blocked, prices – even of essentials such as food – have by and large not risen correspondingly. Demand is also very depressed internationally, as reflected in the price of oil and other commodities, and this further depresses domestic prices.
Hence the reason foreign investors oppose Government spending in India at present cannot be any fear of inflation.
- “Foreign investors are worried about the size of the Government debt.”
This is another red herring. Firstly, India’s government debt is overwhelmingly held by Indians, and hence need not be a concern to foreign investors. (In fact, about four-fifths of Government debt is held by entities owned/controlled by the Government itself – public sector banks, public sector insurance firms, the RBI, and provident funds.) The overwhelming bulk of liabilities to foreign investors are owed by Indian corporate firms, not by the Government.
Secondly, the relevant figure to assess the sustainability of Government debt is not its absolute level, but the ratio of Government debt to GDP, since a larger GDP can generate more tax revenues for the Government to make payments on the debt. As it happens, India’s Government debt/GDP ratio has been lower in recent years than in the early 2000s (see Chart 1 below; the data refer to the combined debt of Central and state governments).
Thirdly, if the Government fails to spend adequately, GDP will shrink. In that case, even if Government debt stays at the same level, the Government debt/GDP ratio will worsen. Something on these lines is likely to happen now, as India’s GDP shrinks in 2020-21.
To take an example: Let us say that in 2019-20 Government debt is 72 per cent of GDP, and the Government projects that in 2020-21, GDP will rise in nominal terms by 10 per cent. Let us assume that, in an effort to keep down its debt, the Government decides to keep down its spending. It borrows a sum worth 8 per cent of GDP in 2020-21. If nominal GDP were to grow as the Government projects, the Government debt/GDP ratio would hardly increase.
However, if, in our example, the level of Government spending turns out to be too little to ensure growth, and economy slips into a recession/depression, the following could happen: The GDP might shrink 10 per cent in real terms, and even the nominal GDP (i.e., including inflation) may wind up 6 per cent lower than the previous year. Now the same debt burden would shoot up to 90 per cent of GDP – because GDP is lower, which in turn is because Government spending did not boost demand adequately. That is, the debt/GDP ratio in this case deteriorates because spending is too low in the present situation. (This is what happened, for example, to Greece.)
Yet foreign investors ignore this, and oppose any sizeable increase in Government spending, even in a depression.
Fourthly, if foreign investors are for some reason obsessed about the growth of Government debt, it should be obvious to them that there are two ways to curb Government borrowing: to reduce spending, or to raise tax revenues. Foreign investors press only for reducing spending.
Besides, within tax revenues, there are broadly two ways to raise tax revenues: taxes on goods and services, which are paid by all, or taxes on income, which are paid by the better-off. Thus there is a clear division of class interests in deciding how to bridge the fiscal deficit. Foreign investors support taxes on goods and services, which are mostly paid by the vast majority, but are vehemently opposed to increasing taxes on income of individuals and corporations.
Why? Because (i) they too would have to pay taxes on income; (ii) much of foreign investment caters to elite markets, so foreign investors are in favour of concentration of income, as this expands the market for their goods, whereas taxation of income is generally progressive, i.e., it reduces inequality; and (iii) concentration of income in the hands of the top 5-10 per cent buoys the share market, and thereby increases the price of shares owned by foreign investors.
From this it is crystal clear that foreign investors are not concerned with the government debt as such. That is merely an excuse for them to apply pressure for reduction of government spending.
A recent incident reveals how acutely sensitive the Government is to the concerns of foreign investors. Recently, a group of Indian Revenue Service officers, on their own initiative, prepared a report on the Government’s fiscal options in response to Covid-19, suggesting some – very moderate – increases in taxation of the rich.[3] Far from appreciating their patriotic efforts, the Government reacted with alarm and vindictiveness: it condemned the report, instituted an inquiry against 50 junior officers, and chargesheeted three senior officers, relieving them of their posts. The authorities claimed:“The report created panic and tax policy uncertainty in the already stressed economic conditions in the country.”
- “Foreign investors are ideologically opposed to the public sector and Government spending.”
This statement has an element of truth. There is an elaborate ideological edifice of neoliberalism, including notions about the ‘free market’, ‘individualism’, ‘dynamism of private enterprise’ ‘inefficiency of the public sector’, ‘removing distortions in the market’, etc, which cast a spell over many intellectuals. Such propositions, however bogus they may be, form the very frame of thinking of most economists today: they have been trained in them, they practice them continuously, and they do not conceive of anything beyond them.
Nevertheless, the ideological frame would at best explain the thinking of economists. Ideology does not adequately explain the conduct of foreign investors. Firstly, if powerful business interests are ideologically opposed to something, that begs the question: what attracts them to that particular ideology, since they keenly calculate the financial costs and benefits of every policy? Secondly, whenever international capital finds any cherished ideological tenet in conflict with its cold hard profits, it discards that tenet without much ado. This is visible during each crisis, such as the Great Financial Crisis of 2008, or the present Covid-19 crisis. The world’s richest countries, led by the United States, jack up their fiscal deficits dramatically – 10, 15, 20 per cent of GDP, till the economy recovers. After it does recover, they go back to preaching the virtues of austerity.
Thus ideology cannot basically explain the opposition of foreign investors to Government spending in India and other underdeveloped countries.
B. The real reasons for foreign investors’ opposition
A regime of ‘austerity’ in government spending, while ruinous for a particular economy, can yield rich returns for foreign investors. The following are not distinct points, but are different aspects of a single theme.
(i) When a government refuses to spend and revive demand, economic growth depends entirely on the desire of private sector investors to invest. In order to stimulate the private corporate sector to do so, the rulers provide all sorts of inducements and subsidies at the cost of the people. During a crisis, the bounties get even more extravagant. Such gifts to the private corporate sector benefit foreign investors, whether through their local subsidiaries, or their tie-ups with local firms, or through their purchase of shares in local firms.
(ii) Similarly, when governments are under pressure to reduce their fiscal deficits, they carry out ‘reforms’ which create opportunities for private profit-making, albeit at a cost to the public. For example, when governments cut back on infrastructural invesment, as well as public health services, education, agricultural extension services, etc, they correspondingly expand opportunities for private infrastructure firms, private corporate healthcare, private schools and universities, corporate penetration of agriculture, and so on. In pursuit of this aim, India for some years became the world’s leader in ‘public-private partnerships’. These have resulted in massive fiascos and scandals, at a staggering loss to the public, but they remain the Government’s preferred method of performing its functions.
(iii) Further, under the banner of reducing the fiscal deficit, governments sell shares in profitable public sector firms, or sell off the firms outright. Since governments are selling these assets under pressure of time and budgetary targets, they sell them in ‘fire sales’, i.e., at distress prices. These create bonanzas for cash-rich foreign investors.
We have just seen a living demonstration of all the above three points, with the Finance Minister’s marathon presentation of the Government’s economic package ‘for Covid-19’. The package contains government spending worth hardly 1 per cent of GDP; but under the cover of addressing the crisis, it brings in a staggering list of privatisations, deregulations, and other gifts to the corporate sector and foreign investors. As we mentioned in the earlier instalment of this article, when foreign investors oppose an expansion of Government expenditure, the Government banks solely on stimulating the ‘animal spirits’ of capitalists to invest, by providing them incentives and concessions of all types. This the present Government has again turned to with gusto.
(iv) Finally, slashing government spending depresses domestic demand. That depresses the prices of assets and labour power in the country. It may also lead to domestic firms making losses, and defaulting on their loans. Foreign investors can then buy up various assets, including debt-stressed Indian private firms, at distress prices. (In fact, a section of the large corporate sector in India is itself worried about this, and has been asking the Government to increase its spending and boost demand.)
In times of worldwide crisis, governments of the developed world expand their spending dramatically, even as governments of underdeveloped countries like India (or even relatively weaker capitalist countries like Greece) put government spending on a starvation diet. In this situation, corporations of the developed world are even better equipped to ‘raid’ underdeveloped countries for their distressed assets.
What this means is that, even though the crisis reduces ‘regular’ profits for international capital, it is also an opportunity for it to make extraordinary windfall gains. In particular, prolonging or deepening the crisis in underdeveloped or weak countries, and exercising tight control over government policies in those countries, can yield bonanzas to international capital.
C. Examples of how foreign finance makes use of a crisis in weak and subordinate countries
In an Endnote, we take three examples of how foreign finance uses a crisis in a weak or subordinate country to extract gains for itself. Although these three examples (of South Korea, Thailand, and Greece) are striking, they are also fairly representative, and many more could be cited.
In fact, the 1997-98 Asian financial crisis spanned a number of countries with widely differing economies. All these countries had recently liberalised their economies, received substantial inflows of foreign capital, and at this juncture, in rapid succession, were hit by outflows of foreign capital. They turned to the International Monetary Fund (IMF) for emergency loans. The IMF used the crisis to engineer a foreign (in particular, US) financial invasion of these economies.
In the case of South Korea, which had a fiscal surplus, the IMF nevertheless insisted on fiscal cuts and high interest rates. The ensuing economic crash was the predictable and planned outcome of this programme. The IMF demanded the break-up of Korea’s distinctive business conglomerates (the chaebol) that controlled the economy, so as to allow scope for foreign capital; labour market ‘flexibility’ (large scale retrenchments, and replacement with contract workers with low wages and no security); and freedom to foreign investors in the share market and in direct investment, including hostile takeovers of Korean firms. A massive transfer of Korean assets to foreign hands ensued. Major Korean firms – Samsung, POSCO, Hyundai – became majority foreign-owned, as did the bulk of the banking sector. The sale of Korean assets, whether private or government-owned, took place at distress prices. Since foreign investors alone were flush with funds, they won the jackpot. Meanwhile small firms folded up, the working class was informalized, and inequality rose.
All these same measures were implemented in Thailand, with the same results. As in South Korea, so too in Thailand the US and its intellectual entourage blamed what they called ‘crony capitalism’ for the crisis. A sizeable share of Thai industry and the dominant part of the financial sector came under foreign control. Sections of the Thai big bourgeoisie which had earlier taken large foreign loans, but who now tried to retain control of their firms during the crisis, sank; those who adjusted to a diminished role, as gateways for foreign capital, survived – even flourished.
Greece’s economy had grown rapidly in the period before the Global Financial Crisis of 2008; so had its government deficits and foreign borrowings. The main sources of its foreign debt were banks within the European Union (EU), in Germany, France and the UK. A market panic was engineered in 2010 regarding the size of Greece’s public debt, after which Greece was unable to borrow internationally, and had to turn to the IMF and EU for a bail-out. The alternative – for Greece to default, leave the EU, and revive its own (pre-euro) currency – would have opened up the path for Greece’s eventual recovery. This was hurriedly pre-empted by the IMF-EU ‘bail-out’ of 2010, ensuring Greece adhered to the path laid down by international capital.
As conditions for this and two further ‘bail-outs’, the IMF, EU, and European Central Bank imposed on Greece drastic cuts in government expenditure, mass retrenchments, increases in consumption tax, and privatisations. These caused a catastrophic and predictable shrinkage of the Greek economy. However, the public debt did not decline, but slightly rose; and more importantly, the debt/GDP ratio rose by over 50 percentage points, because GDP itself shrank by more than one-fifth. There is no foreseeable exit for Greece from debt and the associated conditions, stretching four decades into the future. Unemployment has soared; wages have fallen; and poverty has shot up.
It is a fiction that Greece’s privatisation programme can reduce its public debt. IMF data show privatisation has reduced the public debt by 1.3 per cent during 2008-18, and will reduce it another 1.2 per cent in 2019-28. Privatisation revenues are at any rate depressed by the fact that public assets are being sold at distressed prices, at the point of a financial gun, during a worldwide economic decline. State-owned enterprises, infrastructure (including 35 ports, 40 airports, and the natural gas company), buildings, ports, 3,000 pices of real estate, national monuments, national roads, and the military industry are all up for grabs. The deals are a scandal, as in the instance of the Frankfurt airport-led Fraport consortium’s takeover of Greece’s 14 busiest regional airports, major tourism hubs, for €1.23 billion.
A few general observations, in telegraphic form, on the basis of the examples in the Endnote:
(i) These economies were rendered vulnerable precisely by the large inflows of capital they had received in the wake of further liberalisation or integration with the global economy.
(ii) The above three economies were not typical debtor countries. They were classified as middle to high income; South Korea and Greece are members of the rich nations’ club, the OECD; Greece is a NATO member; South Korea houses 36,000 US troops; Thailand was a military ally of the US at the time. Despite this, their economies were thrown into crises, and they were ruthlessly stripped of their assets. Other, weaker, economies like India can assess their own chances from the fate of the above three.
(iii) When the crisis arrived, the ruling classes of South Korea, Thailand and Greece simply transferred their foreign liabilities to the people – they became a debt for the people to work off. Imperialism overnight invented myths – ‘crony capitalism’ in Asia, ‘lazy/pampered/overpaid workers’ in Greece, ‘statistical fraud’ in Greece – to justify its rapacious attack.
(iv) Once the crisis arrived, an austerity regime was immediately imposed by the IMF and other institutions. This regime was designed to prolong and deepen the crisis, and to take away any instruments by which the economy could recover. Government spending was placed under tight restraint.
There is a noteworthy difference between East Asia and Greece: After 1997, the world economy experienced a revival. In particular, the Asian economies, more integrated with the rapidly growing Chinese economy, recovered and grew rapidly (albeit in a more distorted way). By contrast, after 2008, the world economy did not experience a real revival. Within this, there was no scope for the Greek economy to recover even in a more subjugated form. Any economy now going into a crisis of this type will have bleak chances of full recovery; it might even shrink permanently, as did Greece.
(v) Once the crisis set in, the native ruling classes of the affected countries haggled for some time or to some extent, but ultimately they threw in their lot with foreign capital, and adjusted their operation to its tighter grip. The ruling class sections that adjusted better to their more subordinate status survived, even flourished, in that role.
(vi) The agent institutions – the IMF, EU, ECB, and credit ratings agencies – used the foreign liabilities of these economies as a lever with which to prise them open and separate them from their precious assets.
(vii) The entire process effected a large-scale transfer of domestic assets to imperialism. The various elements of the domestic economy – labour, small firms, the public sector, even the large corporate sector – were extensively re-structured in favour of foreign capital.
(viii) Imperialism does not necessarily have a stake in reviving productive activity. Particularly in its present phase, uncertain of the prospects for long term growth, its cannibalistic aspect comes to the fore. Hence it has used these crises, indeed prolonged and deepened them, with a view to pick portions off the targeted economies.
(ix) People resisted, defended their rights as workers/working people, and defended their country’s sovereignty as part of that. At places they even unseated the native rulers. But, in the absence of a political force grounded among the masses that truly represented the people’s basic and long term interests, the ruling classes and imperialism were able to restore their grip.
With these observations in mind, let us turn to India.
D. India’s credit boom and bust
There are certain similarities between India and the crisis-hit countries we have just described. These arise from (i) the role of international finance in fueling the pattern of growth experienced in their ‘boom’ periods; and (ii) the regimes of austerity and deflation put in place thereafter, and the consequent transfer of the country’s assets to foreign investors.
The boom
As R. Nagaraj puts it, India’s “dream run” of 2003-08 “was, in fact, a typical credit boom, with its source of finance sowing the seeds of its own destruction.”[4] To draw on his account: As the advanced economies expanded credit massively from 2002, capital flows from these economies to ‘emerging markets’ more than doubled from 2002 to 2007. In India, foreign capital inflows soared to 10 per cent of GDP by 2007-08, the peak of India’s boom.
Less than one-fourth of foreign flows were absorbed by investment. However, they played a larger role in triggering the boom. As foreign capital flowed in, the banking system was flush with funds.[5] Banks now liberally lent to a range of borrowers from infrastructure investors to flat-buyers. The ratio of bank credit to GDP rose from 35 per cent in 2002-03 to 50 per cent in 2007-08.
Source: RBI, Handbook of Statistics on the Indian Economy, 2018-19
Easy inflows of foreign capital fueled bank credit at low interest rates. Foreign investment in the share market led to share prices soaring, enabling companies to raise capital cheaply through new share issues.[6] The private corporate sector more readily took on risky investments and speculative land purchases. The ratio of profit after tax to net worth of firms doubled, from 9.1 per cent in 2002-03 to 18.2 per cent in 2006-07.
With the Government encouraging ‘public-private partnerships’ by the corporate sector with loans from the public sector banks, the share of ‘infrastructure’ (power, telecoms, and roads) in bank credit rose from 9 per cent in 2003 to 33.5 per cent in 2011. At the same time, credit fueled a boom in consumerism of the better-off sections, with the share of personal loans (for housing, automobiles, and consumer durables) in bank credit nearly doubling between 2000-01 and 2005-06. The pattern of production was skewed even further to elite markets, rather than mass consumption. Rapid growth reinforced the prevailing belief that India was at a ‘take-off’ stage, and the endemic problem of demand was now a thing of the past. The Government’s Economic Survey 2016-17 looked back on this period thus:
Firms… launched new projects worth lakhs of crores, particularly in infrastructure-related areas such as power generation, steel, and telecoms, setting off the biggest investment boom in the country’s history…. This investment was financed by an astonishing credit boom, also the largest in the nation’s history, one that was sizeable even compared to other large credit booms internationally. In the span of just three years, running from 2004-05 to 2008-09, the amount of non-food bank credit doubled And this was just the credit from banks: there were also large inflows of funding from overseas…. All of this added up to an extraordinary increase in the debt of non-financial corporations.
Accumulation through grabbing public assets, subsidies, and natural resources
As the prospects of rapid accumulation of wealth whetted the appetites of the large capitalists, they turned to the public sector banks for loans and the Government for all sorts of assistance. The boom was thus further fueled by a massive private grab of public assets, Government subsidies and natural resources (which are not amenable to being valued in money terms, since they cannot be replaced) in the name of infrastructure. India was the world leader in public-private partnerships (PPP) between 2006 and 2012. By end December 2012, it had over 900 PPP projects in the infrastructure sector, at different stages of implementation. But this growth in PPPs was birth-marked with scandal: thus private airports, coal mining (power), and natural gas exploration have been the subjects of critical reports by the Comptroller and Auditor General (CAG).
More generally, the private pillage of natural resources during the ‘boom’ later was manifested in a number of scandals: the manipulation of allocations of radio frequencies for mobile services; illegal mining of iron ore and its export; large-scale land acquisitions for special economic zones (SEZs) in the name of industrial activity, but actually for the purpose of real estate; PPP road projects; and so on. An important aspect of these deals was that, by systematically overstating (‘gold-plating’) the project cost and borrowing the major portion of these overstated costs from public sector banks, many private promoters actually invested no money of their own in the projects. A Reserve Bank deputy governor said that the funding for the PPPs had come so largely from the public sector banks, rather than the promoters’ pockets, that “the ‘Public-Private partnership’ has, in effect, remained a ‘Public only’ venture”.[7] Gajendra Haldea, at the time principal advisor to the Planning Commission on infrastructure and PPPs, states:
Financing of gold-plated costs, reckless disbursement of funds, irresponsible waiver of conditionalities, bypassing of contract terms, lack of any worthwhile stake of the project sponsors and diversion of funds became the principal attribute of public sector bank (PSB) lending to the infrastructure projects. This was brought out in a Discussion Paper titled ‘Subprime Highways’ circulated by the author in June 2010. However, given the inconvenient facts stated in that paper, it was ignored, perhaps deliberately by the relevant ministries as well as the PSBs. This story was reinforced in another Discussion Paper titled ‘Infrastructure: a Policy Logjam’ that was brought out by the author in June 2013, but this too was overlooked.[8]
Haldea demonstrates that private road projects were gold-plated an average of 90 per cent over the actual project cost. He estimates that ‘haircuts’ (write-offs) and budgetary support amounting to Rs 6 lakh crore ($100 billion at the time of his estimate) would be required to restore the health of public sector banks and other financial institutions which had lent to these infrastructure projects.
Since these assets and funds have been alienated from the Indian public, it would stand to reason that, when these private promoters later failed to service their debt, the assets should have come to the hands of the public, and the authorities should have relentlessly pursued private owners for the return of funds, including by expropriating their entire property and arresting them. However, what in fact happens is a second alienation of public assets, as we shall see below.
Global Financial Crisis and two phases of fiscal deficit: rising and falling
In 2008 the Global Financial Crisis put a sudden stop to foreign inflows. Credit froze, and growth slumped, worldwide and in India. However, the world’s leading economies, whose own financial sector was endangered, quickly came together to revive global growth. They allowed, even encouraged, the weaker economies and Third World countries to expand their government spending for about two years, approximately India’s fiscal years 2008-09 and 2009-10. In those two years the Centre’s fiscal deficit soared from 2.5 per cent of GDP to 6.5 per cent (see Chart 3 below).
Source: Economic Survey
Source: National Statistical Office. Gross Domestic Product at factor cost in 2004-05 series; Gross Value Added at basic prices in 2011-12 series.
In the chart of GDP growth (Chart 4) above, we can mark out different phases.
(i) From about 2003, there was a surge in growth. With large capital inflows and a credit boom, private investment and consumption powered growth. The Government’s fiscal deficits (see Chart 3) meanwhile fell to just 2.5 per cent at the height of the growth boom – which, as is often the case in such booms, came just before the fall.
(ii) In 2008-09, with the Global Financial Crisis, GDP growth slumped.
(iii) However, the Government expanded the fiscal deficit and bank lending in 2008-09 and 2009-10, which led to growth reviving in 2009-10 and 2010-11.
(iv) At that point, the international environment turned hostile once more to public spending. The Government started reducing expenditure once again, and growth slowed once more. (The picture is a bit confused due to the Government’s new series of GDP, base year 2011-12, which overstates GDP growth due to its dubious methods. But even this series shows GVA growth falling from 2016-17 on, finally landing at 3.9 per cent growth in 2019-20, i.e., the same level as 2002-03.)
Why did growth slow post-Global Financial Crisis despite inflows?
One question arises from the above three charts (Charts 2, 3, and 4). As we saw, in the phase 2003-08, inflows of foreign capital fueled rapid GDP growth. They did so despite declining Government fiscal deficits. Yet, in the period after the Global Financial Crisis, while fiscal deficits no doubt declined, India once again received large capital inflows. In fact the average for 2009-10 to 2018-19 was $63.4 billion/year, considerably higher than the average for 2003-08, at $44.4 billion/year. Why then did the second round of inflows not spark the same growth boom as the first?
There are three reasons, in our view. Firstly, the global economy never really recovered from the Global Financial Crisis. The biggest beneficiary of the huge financial packages in the developed world was the financial sector of those countries. Meanwhile the world economy was burdened with a huge accumulation of debt, and was slowing down sharply. In particular the Third World (‘emerging markets’) had slowed down sharply. Indeed, the world was poised to re-enter recession even before Covid-19, due to causes internal to, inherent in, its pattern of development.
Secondly, it is partly an illusion that India’s rapid growth of 2003-08 took place amid falling fiscal deficits. After all, private corporate investment during this period was funded by public sector banks. Instead of the Government itself borrowing (i.e., incurring a fiscal deficit) for infrastructure, Government-owned banks provided loans to the private corporate sector to set up infrastructure. The losses on that would eventually have to be borne by the Government, in the form of recapitalising of the banks which had lent to the private firms. Thus, by encouraging risky, publicly funded, private investment in infrastructure in the 2003-08 period, the Government was incurring a ‘postponed fiscal deficit’, which simply came onto the Government’s books in the later period, when the private firms defaulted.
Thirdly, and more basically, the rapid growth of 2003-08 was bound to slow at some point precisely because it was not a ‘new normal’ but a bubble. The endemic problem of demand in the Indian economy, which we have referred to in Part IIof this article, had to come to the fore once again. Given the poverty of the Indian masses, they did not constitute an attractive market for big capital. The boom was thus skewed heavily towards elite demand; but the growth of this demand could not be sustained endlessly. The types of economic, social, and political changes required to bring about widespread and evenly distributed increases in demand, and to re-orient production to cater to that demand, were nowhere on the horizon; rather the rulers continued to move aggressively in the opposite direction, destroying livelihoods on a large scale, depressing wages, and concentrating wealth. Hence the boom was fated to peter out.
After 2010, the picture of slowing growth and continuing large capital inflows brought out in the above charts implies a growing burden of foreign liabilities on the weakening economic base of our country. That contradiction must at some point be resolved: either through repudiation of the foreign liabilities, which will not happen under the existing social order, or through Indian assets getting transferred to foreign hands.
The Rajan regime of demand-suppression
In May and June 2013, the US central bank, the Federal Reserve, began talking of gradually reducing the flood of money supply it had unleashed to tackle the 2008 crisis. Developing countries had received a share of capital inflows due to that earlier policy, boosting their growth. The signs that it would soon be reversed soon set off a panic, with capital flows halting, external borrowing rates rising, exchange rates depreciating and share markets falling. India was suddenly listed among the ‘fragile five’ economies (along with Brazil, South Africa, Turkey, and Indonesia) that were prone to shocks as the US ‘tapered’ off its earlier measures.
In this situation, former chief economist of the IMF, Raghuram Rajan, was appointed governor of the Reserve Bank of India. In his first statement as governor (September 4, 2013), Rajan asserted that the primary role of the central bank was to keep prices low, whatever be the reason for price rise. He then set about instituting measures to bring down inflation by depressing the incomes of peasants and other small producers, and the wages of workers.
Rajan set up an ‘expert committee’ to prepare a monetary policy framework for the RBI (and thereby, for the Government). The committee’s report asserted the need for an iron frame to constrain the Government from spending. If the Government increased demand by spending, the central bank would have to suppress demand by jacking up interest rates. The class nature of this ‘inflation control’ became clear very rapidly. The report specifically criticised measures such as rural employment schemes and the Food Security Act:
…the Government must set a path of fiscal consolidation with zero or few escape clauses; ideally this should be legislated and publicly communicated. Furthermore, it may be important to identify and address other fiscal/administrative sources of pressure on inflation/drivers of inflation persistence. For instance, the design of programmes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provide a sustained upward push to nominal wages unrelated to productivity growth, and the National Food Security Act which could increase demand for foodgrains without corresponding efforts to augment supply. A policy-induced wage-price/cost-price spiral can be damaging for the credibility of an inflation targeting framework. The burden on monetary policy to compensate for these sources of inflation pressure is correspondingly higher.
A Monetary Policy Committee was set up, with the sole target of keeping the inflation rate at 4 per cent. Inflation came down steadily, and this is trumpeted as an achievement of the RBI and the Government.[9] However, since the incomes of working people actually fell in this period (as we saw in an earlier instalment of this article), whom did ‘inflation targeting’ actually serve? It served the medium-term interests of foreign capital: demand shrank, and the price of Indian assets was further and further depressed.
NPAs: Offspring of the bubble
Rajan’s next major project concerned the bad debts, particularly the large debts owed to the banks by the corporate sector. Before we come to Rajan’s steps, let us describe the background.
In the period before Modi’s election in 2014, the corporate media had made out that the reason for the slump in the economy was ‘policy paralysis’, and the stalling of environmental clearances for industrial/mining projects. The Economic Survey 2014-15, however, punctured this:
Perhaps contrary to popular belief, the evidence points towards over-exuberance and a credit bubble as primary reasons (rather than lack of regulatory clearances) for stalled projects in the private sector…. An unambiguous fact emerging from the data is that the debt to equity for Indian non-financial corporates has been rising at a fairly alarming rate over time and is significantly higher when viewed against other comparator countries.
Tying things together… suggests that Indian firms face a classic debt overhang problem in the aftermath of a debt fuelled investment bubble…
The Economic Survey 2016-17 described the descent into the corporate NPA crisis, and its scale:
…[F]orecast revenues collapsed after the Global Financial Crisis; projects that had been built around the assumption that growth would continue at double-digit levels were suddenly confronted with growth rates half that level. As if these problems were not enough, financing costs increased sharply. Firms that borrowed domestically suffered when the RBI increased interest rates to quell double-digit inflation. And firms that had borrowed abroad when the rupee was trading around Rs 40/dollar were hit hard when the rupee depreciated, forcing them to repay their debts at exchange rates closer to Rs 60-70/dollar.
By 2013, nearly one-third of corporate debt was owed by companies with an interest coverage ratio less than 1 (“IC1 companies”) [meaning they did not earn enough to pay the interest obligations on their loans], many of them in the infrastructure (especially power generation) and metals sectors. By 2015, the share of IC1 companies reached nearly 40 percent…
Accordingly, banks decided to give stressed enterprises more time by postponing loan repayments, restructuring by 2014-15 no less than 6.4 percent of their loans outstanding. They also extended fresh funding to the stressed firms to tide them over until demand recovered.
As a result, total stressed assets have far exceeded the headline figure of NPAs. To that amount one needs to add the restructured loans, as well as the loans owed by IC1 companies that have not even been recognised as problem debts – the ones that have been “evergreened”, where banks lend firms the money needed to pay their interest obligations. Market analysts estimate that the unrecognised debts are around 4 percent of gross loans, and perhaps 5 percent at public sector banks. In that case, total stressed assets would amount to about 16.6 per cent of banking system loans – and nearly 20 percent of loans at the [Government-owned] banks.
[Further,] aggregate cash flow in the stressed companies – which even in 2014 wasn’t sufficient to service their debts – has fallen by roughly 40 percent in less than two years. These companies have consequently had to borrow considerable amounts in order to continue their operations. Debts of the top 10 stressed corporate groups, in particular, have increased at an extraordinarily rapid rate, essentially tripling in the last six years. As this has occurred, their interest obligations have climbed rapidly.
At the same time, corporate stress seems to be spreading. For much of the period since the Global Financial Crisis, the problems were concentrated in the large companies which had taken on excessive leverage during the mid-2000s boom, while the more cautious smaller and midsize companies had by and large continued to service their debts. Starting in the second half of 2016, however, a significant proportion of the increases in NPAs – four-fifths of the slippages during the second quarter – came from mid-size and MSMEs, as smaller companies that had been suffering from poor sales and profitability for a number of years struggled to remain current on their debts. (emphasis added)
In fact the crisis spread from the large firms to smaller ones. One route of this was that larger firms simply did not clear their dues to small and medium enterprises.
As the economy slowed down further and further after 2010, and the revenues from PPP projects appeared less attractive, private investors stopped work on these projects. The number of PPP projects under implementation fell from 900 in December 2012 to 63 in 2018 and 34 in 2019.[10]
Despite extensive ‘re-structuring’ of corporate debt, the borrowing firms were not able to revive their financial position, presumably because the bulk of such investments were risky or unsound in the first place. In August-November 2015, the RBI carried out a special inspection of the banks, and found that the banks were using various means to avoid classifying many loans as ‘non-performing’ (i.e., in default). Rajan talked tough and told the banks to re-classify such loans by March 2016. This led to an immediate surge in non-performing assets (NPAs) of banks.
Chart 5: Bank NPAs (as % of gross advances)
Source: R. Nagaraj, “Understanding India’s Economic Slowdown”, The India Forum, February 7, 2020.
Here we need to distinguish between two things: the responsibility for a phenomenon, and the agenda behind tackling that phenomenon in a certain way. Clearly, the Indian large capitalist class was responsible for the phenomenon of corporate sector NPAs, with the encouragement of foreign finance and the critical help of the Indian State. What was required in response to the NPA phenomenon was the nationalisation of all the assets involved (which were already publicly funded) and the relentless pursuit of corporate defaulters for recovery of diverted funds. By contrast, Rajan’s sudden decision to ‘crack down’ by classifying a much larger number of corporate debts as NPAs was not part of any such national developmental agenda. Rather, it subtly advanced a different agenda, one which would ultimately benefit, not the Indian public, but foreign financial investors.
A major step forward in this process was the legislation of an Insolvency and Bankruptcy Code (IBC) in 2016. Before this, beginning in the 1980s, there had been a number of restructuring/rehabilitation schemes for the debts of firms, but in practice these largely helped the borrowing corporate firms to retain their hold and divert funds. The IBC, by contrast, enforces a timebound process, in which, not the debtor firm, but the creditors, are in control. The creditors appoint ‘insolvency professionals’ who take over the assets and bring about a speedy ‘resolution’, most often the sale of the asset to other investors. Successive RBI circulars have made the process even tighter. This is to be seen in the light of a major underlying development.
Build-up of ECBs
A further source of vulnerability of the Indian corporate sector is the rise of corporate dependence on foreign debt. This was in part a fall-out of the corporate funding crunch domestically. After the Global Financial Crisis, India’s corporate sector turned even more heavily to external commercial borrowings (ECBs). These increased from 27.1 per cent of India’s external debt in 2010 to 39.7 per cent in December-end 2019, at which point they stood at $223.8 billion.
In 2016, the RBI had tightened regulations regarding ECBs in a number of ways, among them requiring that borrowers ‘hedge’ their external borrowings 100 per cent. (‘Hedging’ means to buy a special financial contract which protects you against the risk of a change in a particular price. In this case, since ECBs would have to be repaid in dollars or other such currencies, and there is a risk that the rupee might fall more than anticipated vis-a-vis the dollar, the borrower might have to pay back more rupees than anticipated, leading to a crisis. A ‘hedge’ in such a situation would be a financial contract which promises the buyer more returns if the rupee depreciates against the dollar. In this way, the losses on the original contract would be cancelled out partly or wholly by the ‘hedge’ contract. Such contracts, which are a form of insurance, are sold every day on the financial markets.) As a result of the RBI’s more restrictive regulations and tightened monitoring, the flow of ECBs temporarily dropped.
Source: Ministry of Finance. All figures are for end-March, unless otherwise specified.
In 2018, however, the Government put pressure on the RBI to relax ECBs once again, in order to give relief to the corporate sector as well as to attract more foreign inflows. The RBI provided the requested relaxations, allowing ECBs with only 70 per cent hedging in place of 100 per cent hedging. Private corporate borrowers took to ECBs once more with gusto, and in January-December 2019 ECBs rose by $29 billion.
It is also quite likely that some firms did not hedge 70 per cent, or did not hedge at all, and the RBI decided to wink at this. According to the chief economist of CARE Ratings, which published a study on the rise in ECBs, a hedge would cost 4-4.5 per cent, and so many companies borrowed without any cover, betting on a stable exchange rate.[11]
In particular there was a surge of borrowing by the financial services sector – banks, non-banking financial corporations, housing finance companies, and mutual funds. In the wake of the September 2018 collapse of the mammoth non-banking financial corporation (NBFC), IL&FS, and the crisis in Dewan Housing Finance, the confidence of banks and investors was shaken. NBFCs were unable to raise funds from domestic banks and the capital markets. To ease the problem, the RBI opened the doors for NBFCs to borrow from ECBs. In July 2019, the RBI relaxed the uses to which ECBs could be put, and allowed borrowers to use of these funds for working capital requirements, general corporate purposes, and repayment of rupee loans. Borrowing for on-lending by NBFCs was also permitted. This implies that the financial sector, which in turn holds claims on a large number of debtor firms, is heavily in debt to foreign investors. A sharp slowdown in the economy can lead to firms being unable to service their debts to the financial sector, which will in effect become a part-owner of these firms; the financial sector itself, however, may not be able to service its debts, and may shift hands to foreign investors.
This year, between January 1, 2020 and May 27, the rupee fell 6 per cent against the dollar. This may only be a foretaste of depreciations to come. In the wake of depreciation, Indian firms would have to shell out more rupees to service their foreign debt. If rupee keeps depreciating for a length of time, a certain percentage of firms would be unable to sustain this.
So rapid was the growth that, despite the RBI placing a limit of ECBs at 6.5 per cent of GDP, the actual level of ECBs on December 31, 2019 appears to have long breached that limit, at 7.6 per cent of GDP.
Contracting the micro, small and medium sectors
At the same time, the crisis of the last five years has had the effect of contracting the micro, small and medium enterprises (MSME) sector. While official estimates say MSMEs account for 45 per cent of manufacturing output, 40 per cent of total exports, and nearly 31 of GDP, the Government has failed to conduct a census of the sector since 2006-07.[12] The last sample survey of such enterprises was for 2015-16[13], i.e., before demonetisation. The Government follows the untenable procedure of basing its estimates of unorganised sector growth on organised sector growth, thereby systematically concealing the scale of the crisis in the former sector, such as after demonetisation.[14]
In stark contrast to the debt binge in the large sector, the MSME sector has been on a starvation diet. The already meagre bank credit to micro and small units has been falling further as a percentage of total bank credit, from 6.3 per cent in February 2015 to 4.2 per cent in February 2020. The corresponding figures for medium units are 2.2 and 1.2 per cent. (Chart 7 below) Bank credit to such units has even fallen in absolute terms, after discounting for inflation, as shown by Chart 8 below. Thus bank credit has fallen in real terms by 19 per cent for micro and small units, and 33 per cent for medium units.
Source: RBI
Source: RBI. Deflated by New Consumer Price Index (Rural and Urban Combined).
Parasitic extractions from MSMEs as borrowers and as forced lenders
Two striking facts are well-known in financial circles, but little-mentioned in discussions about the economy. Firstly, small and medium firms are sucked dry by different layers of the financial sector. According to an RBI Committee, formal sector institutions – banks and non-banking financial corporations (NBFCs) – account for only 40 per cent of the credit needs of the micro, small and medium enterprises sector.[15] The gap, to the extent it is met, is met by the ‘informal sector’ – moneylenders of one type or the other. Interest rates for MSMEs on bank debt are much higher than for other industrial borrowers.[16] The All India MSME Association reports that interest rates on bank credit for MSMEs are between 12-15 per cent, 18 per cent in the case of NBFCs, and 24 per cent in the case of moneylenders.[17]
Secondly, as the RBI Committee puts it, large corporate firms who purchase goods or services from MSMEs “tend to use MSMEs as an alternative to banks”, by delaying payments. This is a form of forcible interest-free credit from the small to the big.
In order to delay payments, buyers have incentives to raise objections or point errors in submitted bills…. Like in many other markets, in India, most large corporates operate with MSMEs only on a credit basis. When the buyer does not honour the invoices on time, MSMEs face a financial crunch in the business. Their interest burden increases, cash flow becomes stressed and business continuity is impacted. Such MSMEs hesitate to file complaint against large buyers to MSEFC or fight a legal battle with the buyer to enforce the contract.[18]
The Committee estimates that the average number of debtor days (days till payment is received for work done) is consistently over 90 for the MSMEs. From 2016-17 there is a sharp increase, and the figure for 2017-18 is over 210. How much credit is extorted in this fashion? According to the Minister for MSMEs, Nitin Gadkari, dues to the MSME sector from the corporate sector and the Government are over Rs 5 lakh crore.[19] If this figure is correct, it appears that the overwhelming bulk of this would be from the private corporate sector.[20]
Shutting of small and medium units
One telling indicator of the shrinkage of MSMEs is that employment in them has shrunk even as the employment of large and medium firms has slightly grown. According to surveys by the Centre for Monitoring the Indian Economy (CMIE), total employment in the economy fell by 4 million (or 1 per cent of total employment) just after the November 2016 demonetisation; but the annual reports of large and medium sized companies showed a 2.6 per cent increase in employment. This implies that the contraction was entirely in the unorganised sector.
Similarly, after the introduction of the Goods and Services Tax (GST), which imposed taxes and costs on small businesses that they were unable to bear, total employment shrank a further 5 million (betwen 2017 and 2018); whereas the larger companies, listed on the stock market, reported a 4.7 per cent increase in employment. As Mahesh Vyas points out, “This was expected because the GST helped the larger and more [GST]-compliant companies take over the market shares vacated by the small enterprises. It is therefore quite likely that the brunt of the shocks of demonetisation and the consequent economic slowdown thus far since 2017 has been borne by the unorganised sectors.”[21] (emphasis added)
The SME Chamber of India estimates that close to one million manufacturing units have closed since the end of 2016, due to demonetisation, GST, and the lack of bank credit.[22]
It should be added that in an underdeveloped country like India, where the unorganised sector makes up the overwhelming bulk of employment, survey data do not directly reveal the full extent of unemployment. Those working in the unorganised sector have no unemployment insurance to fall back on, and therefore keep on working even if the income from such work is below subsistence levels. They are then recorded as ‘employed’, whereas in any meaningful sense they are unemployed, to one extent or the other.
E. Result of debt spree followed by stagnation/decline: Major restructuring of India’s economy on the cards
Thus, even before the Covid-19 crisis, the consequences of the above developments were as follows:
(i) The boom of 2003-08, or till 2010, was a credit boom fueled by a surge in capital inflows from abroad. In this boom phase, public assets, Government subsidies and natural resources were transferred on a gargantuan scale to private parties, many of them engaged in setting up ‘public-private partnerships’ in infrastructure.
(ii) The credit boom collapsed; first in 2008-09, then again from 2010-11 onward. With that stimulus gone, GDP growth has been heading downward since then (the grave problems in the Government’s measures of growth merely understate the extent of fall in recent years).
The collapse of the credit boom thus brought once more to the fore the long-standing underlying dearth of demand in the Indian economy and its utterly skewed income and wealth distribution. These constraints could not be overcome without fundamental social change (as explained earlier). In the absence of a fresh bubble, the only means by which the rulers could have revived growth within the existing frame was through Government spending.
(iii) However, external pressure ensured that the Government steadily reduced its spending as a proportion of GDP from 2010-11 on, which in turn ensured that growth would slow down (Chart 9). (The demonetisation of 2016 and the introduction of GST thereafter also dealt blows to the unorganised sector, where the bulk of non-agricultural workers are employed, and thus further depressed demand and growth.)
Source: Economic Survey
Slowing growth also punched gaping holes in the Government’s tax revenues: the 2018-19 net tax revenues of the Centre, which were budgeted at 7.9 per cent of GDP, turned out to be just 6.9 per cent, a shortfall of Rs 1.6 lakh crore; the director of the Finance Ministry-funded National Institute for Public Finance and Policy termed this a “silent fiscal crisis”.[23]The shortfall in tax revenues resulted in the Centre’s spending being cut by a further Rs 1.2 lakh crore in 2018-19 in order to keep down the fiscal deficit. This spending cut further slowed the economy.
(iv) During the period up to 2010-11, the corporate sector had borrowed from public sector banks and made investments on the basis of extravagant projections of growth. Once growth slowed, and the Government would not spend in order to revive it, large segments of the corporate sector were not earning enough to meet their interest obligations. Generous ‘restructuring’ of their debt, including by surreptitiously providing them fresh loans to service their earlier ones, provided the promoters escape routes, but could not financially revive these projects.
(v) In the period after 2010-11, the corporate sector also built up a heavy load of external commercial borrowings, rising from $70.7 billion in March 2010 to $223.8 billion in December 2019, i.e., a growth of $153 billion, or Rs 10.9 lakh crore at the then prevailing exchange rate. Not all of this was an additional debt (since some of it substituted debt to Indian banks), and some of this debt brought them temporary relief in the form of cheaper loans. But it created a ticking time bomb, since it was largely contracted on the dangerous assumption that the rupee-dollar exchange rate would remain stable. Any sharp fall in the rupee’s value would send borrowing firms into a crisis.
(vi) The above situation implies that, in a situation of crisis, both the Government and the private sector would part with assets, albeit for different reasons:
The private sector would do so because that is the defined course under capitalism for a firm that cannot sustain its debt burden.
The Government would do so on the excuse of reducing the fiscal deficit. However, that is not the reason it parts with assets. The reason it does so is simply because this is the defined course of development tied to foreign capital. In the neoliberal era, this dictates that public sector assets must be privatised. Any defiance of foreign investors’ directives (once articulated by the IMF/World Bank, but today increasingly by international ‘credit rating’ agencies) would invite instant punishment in the form of capital outflow and crisis; but at any rate the Indian rulers have no wish or intention to mount such defiance.
(vii) During a crisis, assets are inevitably sold at distress prices; and the only parties with the cash to buy them may be foreign firms, and perhaps a handful of large Indian firms with special access to liquidity. (Reportedly, “Three large Indian companies—HDFC Ltd, Reliance and Larsen and Toubro—managed to access almost 39 per cent of all non-convertible debentures floated under this facility in April. Six of the top 15 bond issues under this facility were to large private corporations, accounting for 47.46 per cent of all issues amounting to Rs.85,232 crore.”[24])
(viii) As we saw above, the pre-Covid crisis had already brought about a destruction of unorganised sector enterprises. Now these enterprises have been hit even more severely by the lockdown, and the risk is not confined to the micro and small units. What is crucial to grasp is that this shift is not temporary: many enterprises and livelihoods will not return. What we saw with demonetisation and GST was merely the prelude. As one writer notes:
In short, the writing is on the wall for smaller Indian companies. If this logic of letting the small perish is pursued to its logical conclusion, it will have devastating consequences for the overall economy…. In fact, the contagion, if it takes effect, will not remain confined to small businesses, many medium and large companies may go bankrupt too. The government appears to be inclined to let the assets of these companies be liquidated by banks that will convert their loans into equity.[25]
We already have an economy in which the levels of employment are very low by world standards – less than 40 per cent of the working-age population is employed.[26] These low employment levels are now set to fall further. This high-unemployment economy will become the ‘new normal’.
(x) At the same time, in an effort to revive the ‘animal spirits’ of corporate investment amid a drought of demand, the State is carrying out aggressive changes (‘reforms’) to reduce wages, demolish the lingering remnants of workers’ legal rights, make acquisition of peasant land easier, remove all restrictions on private capital in various sectors such as mining, and in general promise private capital greater ‘ease of doing business’ (even making state government’s ability to borrow contingent on their fulfilling ‘ease of doing business’ norms set by the Centre).
(xi) Taken together, this is a comprehensive, multi-layered restructuring of the Indian economy. Labour is restructured in favour of capital; small firms are restructured or destroyed in favour of big capital; the public sector is cannibalised by private capital; and the domestic economy as a whole is restructured in favour of foreign capital.
While observers have to one extent or the other noted the first three re-structurings mentioned above, the last has gone virtually without note. It is a historic turning-point of great and devastating significance for the Indian people and the Indian nation.
F. The restructuring has already started
The above trends were already being manifested before Covid-19.
Buying opportunities in the share market
Foreign portfolio investors’ (FPIs’) holdings in the Indian share market are very large – they own over 40 per cent of non-promoter holdings of the Nifty-500. Thus FPIs, taken as a bloc, have overwhelming impact on the share market. At the time of a crisis, FPIs tend to exit some of their holdings, and the market as a whole moves downward. When that happens, the market value of FPI holdings falls. However, like any canny investor, FPIs use periods of downturn in the share market to buy shares at low prices. The returns over the years have been huge: The historical value of FPI into Indian equities (i.e., the sum of all the foreign capital inflows into the Indian share market) was $149 billion at end-December 2019[27]; but the market value of FPI holdings on that date was above $463 billion[28], i.e. more than three times more. Thus the Indian share market will offer more ‘buying opportunities’ for FPIs as prices head further down in coming months.
This helps understand why, even at the height of the lockdown, the Indian government deemed the share markets an ‘essential service’, and kept them running, even as foreign investors withdrew large sums. For foreign investors, absolute freedom of entry and exit is essential to maximising their gains, no matter how disruptive the impact on the host economy. The host economy in this case protected their power to disrupt. It is revealing that, at the same time, the Government was denying Indian labourers the freedom to return to their villages, and passenger trains were not considered an essential service. There could be no more stark or literal illustration of the neoliberal tenet of complete mobility of capital and immobility (even shackling) of labour.
Silent wave of foreign takeovers in the private corporate sector
In research reports and the financial media, the debt crisis of the Indian corporate sector is presented quite frankly as a goldmine for foreign investors. The US-based consulting firm McKinsey says:
The restructuring of stressed loans, which amounted to $146 billion on banks’ books in December 2017, will create a one-time opportunity for investors with the risk appetite and operational turnaround expertise in several sectors needed to deploy capital at scale.
In the last three years, there has been a surge in the number of ‘control deals’ (i.e., when a firm changes hands) by foreign investors. In 2017-18, Indian investors accounted for 76 per cent per cent of control deals in India, but in 2018-19, the situation was reversed: foreign investors accounted for 79 per cent of such deals.[29] The trend has continued in 2019-20.
Among such foreign investors are foreign firms as well as different types of investment funds, including ‘private equity’ (PE) funds. PE funds raise capital from institutions or individuals, and directly invest in private companies by negotiation with the promoters. They may buy either minority stakes, controlling stakes or the entire share capital.
According to a November 2019 report commissioned by the Confederation of Indian Industry (CII), foreign PE firms invested $133.4 billion in Indian firms between January 2012 and August 2019, with the figure rising sharply in the last five years, and the size of deals growing. Earlier, foreign PE investors in India tended to be passive, but now deals in which PE firms gain control of the target firm have risen to $9.9 billion in 2018. PE firms have now reportedly earmarked $100 billion to invest in Indian firms.[30]
Chart 10: Historical Private Equity Investments (US $ billion)
* Data for 2019 cover only January-August.
Source: Alvarez and Marsal, op. cit., based on Bain Private Equity Report 2019 and VCC Edge. Figures include venture capital investments.
In earlier years, the managements of larger Indian firms had effectively resisted takeover bids. Hence PE firms targeted smaller or newer enterprises:
Since such foreign funds, seeking managerial control by hostile takeover bids, were apparently frustrated in their efforts [with larger firms], they probably went after newer, and relatively smaller, enterprises and unlisted companies, when such investments were permitted.
Private equity capital, in particular, apparently discovered an opportunity in these investments, which could be termed “predatory lending”. On the flip side, promoters of many Indian firms sought to leverage such foreign funds to leapfrog into the big league, overlooking the downside risks of high costs of external debt in terms of domestic currency (when market conditions turned adverse).[31]
The above comment was prescient: in 2019, the promoter of Cafe Coffee Day committed suicide, leaving a note to the board that he was under pressure from a private equity firm, as well as lenders and the tax authorities.
As the growth slowdown persists, an increasing number of large firms find it impossible to climb out of their debt traps. Fitch Ratings estimates stressed corporate debt in India at $260 billion, and major groups such as the Jaypee Group, Anil Dhirubhai Ambani Group, Lanco and Essar faced insolvency. As a result, a growing number of large Indian corporate firms have either had to sell important assets to foreign investors, or surrendered control of their firms. According to a senior partner of the law firm AZB and partners, “given the stressed landscape, the number of control deals is likely to increase”.[32]
A few instances of asset sales, either completed or being negotiated, are given below (collected from media reports).
Some examples of sale/prospective sale of assets to foreign investors by debt-stressed Indian promoters
Source: Media reports
Foreign investors have also taken over a number of road projects from debt-stressed Indian promoters. Presumably the banks which lent large sums for such projects have taken sizeable ‘haircuts’, which may later require recapitalisation of the banks by the Government:
In a new trend in the road infrastructure space in India, pension funds, sovereign wealth funds and private equity funds from Canada, Abu Dhabi, Australia and Singapore are seen emerging as new owners of road assets… So far, these funds have collectively pumped in about ₹20,000-₹25,000 crore in up-and-running road assets and more funds are on their way. “Ownership of road assets has significantly changed over the last two years…,” said Jagannarayan Padmanabhan, director and practice leader, Transport Infrastructure Advisory, Crisil Risk & Infrastructure Solutions. “Earlier it was L&T IDPL, Ashoka Buildcon, IL&FS and others who were the road developers. Now, you are having a separate set of owners of assets who were not active in this space. These include GIC, CDPQ, CTPID, CPPIB, Macquarie and Esquire Capital, who have now become owners of road assets…. What this means is that other than NHAI, foreign investors are controlling a certain percentage of India’s road assets.”[33]
A Bloomberg report notes that foreign financial investors in India are not interested in new ventures; rather they are keen to buy Indian assets at depressed prices: “Distress is all that excites PE investors now.”[34] (emphasis added) The greater the depression, the greater the distress, and the greater the scope for foreign investors to pick up assets at distress prices.
We need to see in this light the entire set of policies since 2010 – the reduction in Government spending and thereby reduction in aggregate demand, a monetary policy aimed at curbing demand, the Asset Quality Review classifying a large number of corporate debts as NPAs, the legislation of an Insolvency and Bankruptcy Code to speed up the process of putting these debts on the market, and RBI circulars aimed at further speeding up this process. The title of the recent research report commissioned by CII refers to India’s “Distressed Opportunity Landscape”. (This is a peculiar joining of words, since the distress is to one party, and the opportunity is availed of by another.) The report warns that any increase in funds available domestically would make the targeted firms more expensive for foreign investors to buy: “Despite the optimistic outlook of the Indian PE market, investors have some concerns going forward, including – high asset pricing driven by increase in capital availability.”[35]
Importantly, especially after the collapse of the giant private lender IL&FS in September 2018, the entire ‘non-banking financial corporation’ (NBFC) sector found it difficult to borrow money. As mentioned earlier, a large number of such NBFCs borrowed abroad in the last two years. However, many firms to which the NBFCs lent to may find themselves in dire straits as the economy goes deeper into depression in the coming period. If the debtor firms default, the NBFCs may come to control them. At the same time, the NBFCs themselves may be unable to service their debt to foreign lenders. In such a situation, foreign lenders may come to effectively control sizeable assets of non-financial firms.
Implications of foreign takeovers
In the boom phase, as we discussed above, the Indian private corporate sector’s PPP projects received a range of bounties from the Government – subsidies, tax concessions, cheap land, free or undervalued Government-owned infrastructure, and so on. The public sector banks provided loans for these projects. Thus the projects themselves were a form of alienating public assets.
However, now that the Indian private promoters have defaulted on the loans, many of these projects are being transferred to foreign investors, and the banks are accepting large ‘haircuts’ (as much as 85 per cent) on the sums due to them. This amounts to a large transfer of India’s public wealth to foreign investors, on distress terms – a second alienation, as it were.
Further, as foreign investors own an increasingly larger share of the Indian corporate sector, the drain from India will increase. One has only to look at the drain from India on account of just one foreign-owned company, Maruti Suzuki, to get a sense of this.
Finally, the growing weight of foreign-owned firms in the Indian corporate sector will further shape Government policy in favour of foreign investors. If any future Government were to attempt to regulate them in the public interest, foreign firms can twist the Government’s arm with the influence of their home countries or by applying for the dispute to be settled by international arbitration abroad, which is heavily tilted in favour of foreign investors.
Privatisation
The US-based consultancy, Boston Consulting Group, now a key advisor to the Indian government on the Covid crisis, spelled out in 2018 what it called “The $75 Trillion Opportunity in Public Assets”:
Governments around the world are under enormous financial pressure. Budgets remain constrained in many countries while the need for investment – particularly in infrastructure – is growing. A solution, however, is hiding in plain sight. Central governments worldwide control roughly $75 trillion in assets, according to conservative estimates – a staggering sum equal to the combined GDP of all countries…. Government leaders must take aggressive action to harness the value of the public assets under their control… Governments should consider three main transaction models: Corporatization… Partnerships… Privatization.”[36]
A major, even central, gain for foreign investors from the regime of fiscal ‘austerity’ is that it invariably includes a programme of privatisation. The pressure to reduce the fiscal deficit is, as it were, the lever. The prize is public assets.
As such, even within the framework of orthodox economics, there is no justification for linking privatisation to an attempt to bridge the fiscal deficit (i.e., the gap between spending and revenues, which is made up by borrowing). After all, privatisation is the sale of Government assets; but the fiscal deficit is largely made up of current (recurring) expenditures, which create no assets. Selling assets to pay for running expenses is a recipe for a deeper mess. Hence privatisation must be dressed up as ‘reducing the burden of the public sector on Government finances’, ‘increasing efficiency’, ‘increasing national wealth’, and so on, and so forth. We can easily judge the worth of this argument by noting that, in practice, the Government does not use the proceeds of privatisation to invest in other long-lasting, efficiency-improving assets. It merely credits the proceeds of privatisation to its ‘non-tax revenues’; that is, it uses it to meet its running expenses.
The ‘Prime Minister’s Economic Package in the fight against Covid-19’, as presented by the Finance Minister over five days, remarkably contained virtually nothing related to public health. Rather, the centrepiece was privatisation – of the coal sector, of the mineral sector, of airports, of electricity distribution, of the defence industry, of atomic energy, of ‘social infrastructure’ (related to education, healthcare, water supply, sanitation, etc.), of the space programme. Whether or not private investments in all these fields materialise, one point was categorically stated: virtually all public sector enterprises, barring a handful, are to be sold off:
Government will announce a new policy whereby –
List of strategic sectors requiring presence of PSEs [public sector enterprises] in public interest will be notified.
In strategic sectors, at least one enterprise will remain in the public sector but private sector will also be allowed.
In other sectors, PSEs will be privatized (timing to be based on feasibility etc.)
To minimise wasteful administrative costs, number of enterprises in strategic sectors will ordinarily be only one to four; others will be privatised/ merged/ brought under holding companies.
The list of “strategic sectors” has not yet been spelled out, but it is thought to contain atomic energy, defence and the space programme; other possibilities include oil and gas, telecom, and banking and financial services.
The scale of the proposed sell-off is staggering. The Economic Survey 2019-20 says there are about 264 Central public sector enterprises (CPSEs) under 38 different Ministries/Departments. Of these, 13 Ministries/Departments have around 10 CPSEs each under its jurisdiction. Now even in ‘strategic’ sectors, the maximum is to be four; for the remaining sectors, all firms are to be sold over time. Note that this agenda was in fact underway well before Covid-19 and the Prime Minister’s ‘Economic Package’; the pandemic merely offered an excuse for advancing it even more aggressively.
Chart 11: Profitable and Unprofitable Central Public Sector Enterprises under Various Ministries
Source: Economic Survey 2019-20.
The Economic Survey provides a one-point rationale for privatization, namely, that private firms are more profitable than public sector ones, and that this “creates wealth”. The author does not even once ask the question: for whom? Once a firm is private, it creates wealth for its private owners.
Thus the chapter on privatisation begins with the following strange argument: The Government announced, in November 2019, that the oil refining and marketing giant Bharat Petroleum Corporation Ltd (BPCL) would be privatised, i.e., the remaining 53 per cent shares owned by the Government would be sold. At this point, the share price of BPCL rose, whereas that of the similar public sector firm Hindustan Petroleum Corporation Ltd (HPCL) did not. This increase (up to January 14, 2020) “translates into an increase in the value of shareholders’ equity of BPCL of around Rs 33,000 crore…. and thereby an increase in national wealth by the same amount.” (emphasis added)
BPCL has always been making profits, which have been around Rs 7,000-8,000 crore a year for the past five years (indeed, almost all privatisations are of profit-making companies). The rise in the share price of BPCL after the Government’s announcement of its plans to sell its remaining 53 per cent of shares merely indicated that share market investors anticipated that, once privatised, the firm would be able to increase its profits further by jacking up petroleum product prices.
The logic is simple. India has nearly 260 million tonnes (mt) of refining capacity, of which at present 80 mt is in the private sector, and nearly 180 mt in the public sector. With the privatisation of BPCL, roughly 110 mt of refining capacity would be in the private sector, and 150 mt in the public sector – closer to an even match. If HPCL is later privatised too, as the Government indicates, the two would be evenly matched, with a lone Indian Oil Corporation left in the public sector. Secondly, at present 75 per cent of petroleum products distribution is in the public sector, 25 per cent in the private sector; with the privatisation of BPCL, this would shift to 50 per cent in each.
In such a changed situation, it would no longer be possible for the Government to dictate petroleum product prices, even if it wanted to do so. Indeed “bidders [for BPCL] will need assurance that the regime of free-market pricing for fuel stays. Last year, investors in state-owned oil firms got a shock when they were reportedly asked to sacrifice on marketing margins to help lower the cost of fuel in retail markets.”[37] A private owner of BPCL might also shut unprofitable retail outlets, depots and terminals. It might not participate in special Government schemes to extend cooking gas to backward rural areas, just as private banks do not bother to set up branches there.
Thus it is not increased efficiency, and consequent ‘wealth creation’, that share market investors anticipated when they were bidding up share prices of BPCL. They simply anticipated increased extractions from the public in a private sector-dominated oil pricing regime.
BPCL: privatising during a depression
However, the Economic Survey’s triumphant glee at the rise in BPCL share prices up to January 14, 2020 has come up against an embarrassing development: the share price has dropped sharply since then. As we write this, on June 2, 2020, BPCL’s share price is nearly 28 per cent lower than on January 14. It is even 16 per cent lower than on September 13, 2019 (when the first report of BPCL’s possible privatization appeared in the media).[38] That is, by the Survey’s own method, the Covid-crisis depression has wiped out the “increase in national wealth” which the Survey had claimed.
In these depressed conditions, it is clear the Government is getting very low offers from bidders. Thus the Government has had to twice extend the deadline for bids showing interest in buying a stake, from May 2 to June 13 to July 31. However, the Minister for Petroleum and Natural Gas, Dharmendra Pradhan, recently stated in an interview:
Let me categorically assure investors and stakeholders, recently the Finance Minister on her package announcement has categorically come out with a new policy approach on PSUs. For BPCL we have taken a decision prior to COVID-19 situation and we are very firm on our decision.[39]
If the Government proceeds with the privatisation despite the depressed economic environment, as the Minister promises to do, the price obtained for BPCL will be correspondingly low.
How is BPCL to be valued for the purpose of privatisation? We do not know how the Government plans to do this. There are a number of methods used in valuing an asset for the purpose of sale, but only two are relevant here. First, how much interest would the Government have to pay if it instead borrowed the sum (that it would get as the sale price), compared to the stream of revenues it would lose after privatisation (i.e., 53 per cent of the future profits of BPCL)?[40]
It is difficult to know what the future stream of profits of a company would be, since the projection is only as good as the assumptions on which it is based. However, we do know the other relevant fact: that the Central government can borrow at a low rate of interest, at present just 6 per cent a year. Hence any future stream of revenues on BPCL that is higher than, say, 6 per cent per year of the proposed sale price, would make it unprofitable for the Government to privatise.
A second method is to look at the replacement value of BPCL: what would it cost the Government today to put up the assets that BPCL owns? According to the Public Sector Officers’ Association, the present worth of BPCL’s physical assets is Rs 7.5 lakh crore, which would mean that the Government’s stake is worth at least Rs 4 lakh crore, even without adding a premium for handing over control of the company. Analysts at ICICI Securities provide a much lower figure of the value of BPCL’s assets, at Rs 946/share, which they claim is based on the value of recent transactions and, in the case of the replacement cost of the refineries, based on HPCL’s upcoming Rajasthan refinery.[41] At this price, BPCL’s assets would be worth around Rs 2.05 lakh crore. But even at this lower price, the Government shareholding, at 53 per cent, would be worth Rs 1.09 lakh crore. This is about Rs 35,000 crore higher than the higher figures being discussed in the media for the sale of the Government stake.
Nor could it be otherwise. These privatisations are distress sales, and the number of potential purchasers usually number just four or five at most. This year, the Government has set an unprecedented target of Rs 2.1 lakh crore in disinvestment receipts. That means that investors with an appetite for shares in India’s public sector will have a larger choice. In such a situation dumping more assets on the market will simply drive prices down even further. Nevertheless, as tax revenues are certain to collapse this year, the Government will try to sell even more assets in an attempt to keep the fiscal deficit down. The pressure on the Government to do so has increased, with Moody’s now downgrading India, citing, among other things, the deteriorating fiscal position of the Government and its weak implementation of ‘reforms’. A key ‘reform’ desired by the credit rating agencies is privatisation.
It is true that foreign investors are not the only possible beneficiaries of the sale of BPCL. Along with a few multinationals, Reliance Industries Ltd (RIL), the largest Indian private firm in the petroleum sector, is a likely bidder. However, that merely bears out our contention that the privatisation programme as a whole is a bonanza for foreign investors and a handful of top Indian firms with access to funds. (Foreign investors stand to gain through the highly profitable RIL as well. Foreign portfolio investors hold half of the non-promoter holding in the firm. Moreover, as part of a strategy to pare its large debt burden, RIL is in negotiations to sell part of its stake in oil, telecom, and retail to foreign investors.[42])
We have taken BPCL merely as an example. The fact is that privatisation is almost always carried out at depressed prices. This is so worldwide, and in India. Thus the Committee on Disinvestment of Shares in Public Sector Enterprises headed by the then-RBI governor C. Rangarajan admitted in 1993, “There has been virtually universal criticism of underpricing of shares wherever disinvestment has taken place.” Nevertheless, the Committee recommended massive disinvestment.
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Some distinct features
As can be seen from the examples of other countries in the Endnote, India’s experience is not unique. However, two differences are worth noting.
Firstly, in the case of those countries, the IMF (and the EU, ECB in the case of Greece) played the leading role on behalf of international capital. In India’s case, the IMF is relatively in the background, and the lead role is played by credit rating agencies (CRAs) such as Moody’s, Standard and Poor, and Fitch Ratings. Thus while the IMF’s direct intervention was visible to the people of the affected country, in the case of India foreign capital’s intervention appears in the garb of impersonal market forces.
Secondly, in the case of the Asian economies in 1997-98, and Greece after 2010, public opposition and resistance manifested themselves strongly. The rulers of those countries therefore made noises of complaint, or at times refused to sign on the dotted line of the deals imposed by the foreign lenders. Of course, they finally abandoned their posture of resistance, and became the instruments of the IMF/EU programme.
However, in India, the rulers themselves have come forward aggressively with the package of austerity and ‘reforms’ as their own. Even more outlandishly, they have promoted it as ‘self-reliance.’
Indeed, the Government has not faced major political difficulties in imposing fiscal austerity and destructive ‘reform’ measures (such as GST) over the last few years, despite unemployment and poverty growing and real wages declining (see Part II of this article). The rulers have now embarked on a major escalation of such destructive ‘reform’ in the name of tackling Covid-19. How are they secure that they can impose these measures without paying a political price? It appears they are confident that their long-standing divisive and communal policies have disoriented the public sufficiently that no effective resistance is possible. Moreover, the lockdown and various other steps taken in the name of tackling the Covid-19 menace provide them sweeping powers, which they feel will paralyse any potential opposition to their economic programme. Whether or not their confidence is justified we will come to know in the course of time.
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In the following instalment of this article, we look at how the Government is now set on increasing the vulnerability of India even further to volatile foreign capital flows, by attracting foreign investment into Government borrowings.
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Endnote: Financial crisis as opportunity for foreign investors
During 1997 and 1998, a number of countries in southeast and east Asia suffered a crisis. The crisis began in May 1997 with a slide in the value of the Thai currency, the baht. It thereafter spread to Malaysia, the Philippines, Indonesia, Hong Kong, and South Korea, with foreign capital exiting and local currencies getting hammered. Even though these countries had very different economies, they had all carried out liberalisation of external capital flows to one extent or another in recent years. Several of these countries now approached the IMF for emergency loans, which were given on very stiff conditions, requiring sweeping internal changes and causing massive unemployment, steep food price increases, and foreign takeovers. In the course of 1997 and 1998, the terms of these loans resulted in social unrest and political upheaval in these countries, including the fall of the 31-year Suharto regime in Indonesia in the face of mass protests. The lasting image of the period was a photograph of IMF Michel Camdessus standing imperiously with folded arms over Indonesian President Suharto who, head bowed, signed away his country’s sovereignty in exchange for IMF funds. By December 1998, official studies estimated that 40 per cent of Indonesia’s population had fallen below the country’s poverty line since the start of the crisis.
In fact, the IMF, under the tight control of the US Treasury Department, used the crisis to engineer a foreign invasion of the economies of these countries. Thus a calamity for the people of these countries turned out to be a useful episode for international capital, particularly US capital.
South Korea
In June 1996 itself, more than a year before the crisis hit South Korea, the US Treasury Department spelled out its aims in an internal memo: opening up Korean debt and share markets further to foreign investors. This process had already been underway for some years, and Korean corporate conglomerates (the chaebol) massively expanded their foreign borrowing, with debt to foreign banks tripling between 1994 and 1996, reaching $120 billion by late 1997.
This set Korea up for a fall: Once the crisis broke in Thailand, private capital inflows to Korea plummeted a staggering 8 per cent of GDP. The exchange rate of the Korean currency, the won, halved (from 987/US$ in November 1997 to 1900/US$ in January 1998).[43]
Korea approached the IMF for a loan in December 1997, and the IMF set its terms: free capital markets from government control; break up Korea’s distinctive corporate conglomerates (the chaebol); destroy unions by bringing in labour market ‘flexibility’; make the central bank independent of democratic processes; end government intervention in external trade; and allow free entry of foreign investment – including hostile takeovers of Korean firms.
Before the crisis, South Korea, far from running a fiscal deficit, was in fact running a fiscal surplus; the same was true of Thailand, Malaysia, and Indonesia. Even so, all these economies were told by the IMF to cut government spending in order to restore ‘confidence’ in their currencies.[44] The IMF tightened the screws on Korean firms by jacking up interest rates to unbearable levels and closing down many banks. Aggregate demand plummeted. This was the planned outcome of the IMF measures:
the IMF knew full well that the macro policies it imposed on Korea starting in December 1997 would lead to an economic collapse in 1998; an examination of newspaper and business press reports at that time demonstrate that everyone knew this. An economic collapse was the sine qua non [essential condition] of the US-IMF strategy. If the neoliberal powers had tried to impose their free-market revolution under normal conditions… they would have met strong political resistance from labor, large segments of the Korean people, and even some sectors of the business community.[45]
In the words of Larry Summers, Deputy Secretary of the US Treasury Department at the time of the crisis, “Times of financial emergency are times when [outside political] leverage is greatest.” The Wall Street Journal and the New York Times observed that the US Treasury “calls the main shots at the IMF” and that “the IMF had succeeded in using its bailouts to force [Asian] nations to open their markets”. The IMF acknowledged pressure from “The IMF’s major shareholders… The US authorities in particular insisted that strong reforms should be a condition of IMF support.” IMF Director Michel Camdessus unabashedly stated that “the Asian crisis was a ‘blessing in disguise’ because it gave the IMF the leverage to force structural policy changes that the national governments would not otherwise accept.”[46]
As part of the conditions for the IMF loan, South Korea abolished limits on the percentage of corporate stock that foreigners could own, and eased foreign investment regulations in capital markets. The government permitted hostile mergers and acquisitions (M&A) by foreign investors after 1998, and tried to sell financial institutions to foreigners. From 2001 onward began a second phase, with further opening to foreign direct investment (FDI), and further incentives to foreign investors.[47] This set off a massive transfer of assets from Korean to foreign hands:
Korean enterprises could meet the government demand to cut down their debts only through the extensive sale of real assets to foreigners. This forced Korean assets to be offered in a kind of fire sale, to which the collapse of the won also contributed…. Foreigners have gained strong influence over major Korean industries, including semiconductors, automobiles, electronics, telecommunications, petrochemicals and finance. In mid-2001, foreigners owned 56 per cent of the listed shares in Samsung Electronics, 63 per cent of POSCO, and 57 per cent of the listed stock of Hyundai Motors…. Many financial institutions were first sold to foreign private equity funds… The share of foreign ownership of eight large commercial banks rose from 12 per cent in 1998 to 39 per cent in 2003 and 64 per cent in 2004. Foreigners now own more than half the shares in seven of the eight large banks, totally dominating commercial banking.[48]
The stock market too was taken over: the percentage of Korean stock market capitalization owned by foreigners rose from 14.6 per cent in late 1997, jumped to 36.6 in late 2001, then to 42 per cent in late 2004.[49] Foreign portfolio investments (FPI) and FDI together made up a staggering $62 billion in 1998-2000, but FPI does not add to productive capital, and the overwhelming majority of FDI went to foreign acquisitions of domestic firms rather than new (“greenfield”) investment.[50] After the reforms, investment slowed; lending by now-foreign-owned banks shifted from productive activities to consumer lending, and away from small/medium sized firms; and the distribution of income became more unequal.[51]Restrictions on foreign ownership of land and real estate too were abolished in July 1998.
As part of the IMF conditions, the government embarked on public sector retrenchments and privatization. Of the 108 state-owned enterprises, 38 were to be immediately privatized, 34 were to be gradually privatized, 9 would be merged into others or liquidated, and 21 would go through restructuring. In the course of this, 80,000 were to lose their jobs. The revenues of privatization were supposed to fund the government as it took over the debts of private banks. But no matter how much they sold, privatization never came close to generating the revenues needed, and instead public debt surged.[52]
Another key demand of the IMF was ‘labour market flexibility’. The Korean government committed to the IMF that it would amend laws to ease layoffs, and give freedom to private job placement and manpower leasing services. ‘contingent workers’, or what are referred to elsewhere as ‘informal’ workers, without job security and statutory benefits. In January 1998 the new president held a joint meeting with union leaders and big business, and got union leaders to agree to ‘flexibility’. Unemployment soared as more than 100,000 workers were laid off every month of 1998, and the rank and file of the leading trade union revolted and forced the leaders to resign. Re-hiring took place of contingent workers, minimising labour costs; after such ‘re-structuring, estimates of the share of such workers in the Korean workforce range from 36 to 57 per cent.[53]
In brief, South Korea underwent a programme of re-structurings on four fronts: from labour to capital, from small firms to big firms, from the public sector to the private corporate sector, and from domestic capital to international capital.
The sale of assets, whether private or public, to foreigners was done under distress conditions, further accentuated by a collapse in the Korean currency (which made Korean assets cheaper for foreigners). It yielded a bonanza to foreign capital, at great cost to the Korean people. Note that this financial invasion was carried out not on a hostile power, but on a country which had close military and strategic ties to the United States – and which had allowed 36,000 US troops to be stationed on its territory.
Thailand
Thailand underwent a similar re-structuring under IMF dictates. Here we would like to focus on the corporate re-structuring that took place.
A study of Thailand’s corporate sector in the wake of the crisis found that 26 per cent were forced to change their ownership pattern during the crisis period, with 41 firms changing to foreign ownership.[54] Nearly all major business groups had grown with the use of foreign loans in the period leading up to the crisis, and hence were vulnerable once the Thai currency’s value plunged. However, once the crisis set in, the business groups that tried to retain control of their empires collapsed. Whereas the ones that did not try to do so, but quickly sold assets to foreign firms and adapted themselves to acting as their junior partners, recovered and prospered. Thus the Thai Petrochemical Industry (TPI) Group finally had to file for bankruptcy, whereas
Siam Cement Group,… CP Group, the Thai Farmers Bank Group, the Bank of Ayudhya Group, the SPI Group, and the Central Department Store Group, launched reforms to downsize their widely diversified business activities,… and promoted alliances with new foreign partners.
The development of CP Group serves as a typical example. Immediately after the currency crisis, CP Group undertook drastic corporate restructuring and downsized its business by concentrating resources in two core fields: agro-industry and telecommunications. In the process, it transferred profitable sectors of its retail business to foreign partners and then deinvested from the petrochemical industry Through this reorganization, CPF became a holding company to supervise its operations in the agroindustry sector and the core firm to attract foreign investors. Owing to this corporate restructuring, CPF successfully attracted foreign investors, who took about 39 per cent of total shareholdings, and quickly improved its financial indicators….[55]
Similarly, most of the financial sector came under foreign control.
The invasion of Greece
Greece is not a Third World country – or an ‘emerging market economy’, to use the current terminology. It is a member of three elite clubs: the club of advanced economies, the Organisation for Economic Cooperation and Development (OECD); of the European Union; and of the North Atlantic Treaty Organisation (NATO). Its merchant navy is the largest in the world. For a long time it was one of the world’s fastest-growing economies, and in 2008 its per capita income was over $32,000. In the period before the Great Financial Crisis (GFC) of 2008, it experienced rapid growth, fueled by government deficits and foreign borrowings. Government debt was 109 per cent of GDP at current market prices in 2008, a high figure, but comparable to figures for Belgium, Italy, and the US, and much below the figure for Japan. With the GFC, growth of tourism and shipping, its two key industries, slowed, and GDP fell by 1.8 per cent in 2009. Still, till January 2010, Greece was still able to borrow internationally at reasonable rates.
However, in early 2010, allegations suddenly emerged that Greece was deliberately and illegally understating the size of its public debt. The eventual fresh audit performed under the supervision of European authorities could not find proof of illegality, and revised the size of the debt upward by about 10-15 per cent, not an earth-shaking sum; nevertheless the credibility of Greece’s statisics had been destroyed by the media campaign.[56] In August 2010, an IMF officer was installed as the head of Greece’s official statistical agency. He reported to the European Commission without reference to the board of the agency, revising Government deficit and debt figures upward. (Eventually he was found guilty of violations by Greek courts; however, he had already left the country and resides in the US.) The European Commission seized the opportunity and accused Greece of statistical fraud.
In these conditions, a market panic was created, the interest rates on Greek debt soared, effectively making it impossible for Greece to borrow on the international market.
Source: IMF 2010.
The course not taken
In 2009, about 80 percent of public debt was owed to external creditors. A large part of the public debt (€150 billion at end-2009) was held by foreign banks, mostly European.[57] At this point, Greece could have taken the course taken by Argentina earlier, namely, to default. In Argentina’s case, the private foreign lenders were later forced to accept a large ‘haircut’, i.e., a reduction in debts, and this allowed the Argentinian economy to recover. The justification is clear: the lenders themselves bore a responsibility for extending loans which were beyond the capacity of the Greek economy to sustain. In addition to defaulting on private debt, Greece had the option of leaving the euro and returning to its own pre-2001 currency, which would give it flexibility in its exchange rate. While these steps may have inflicted a harsh immediate cost (‘bitter medicine’) on the Greek economy, they could have opened up the path to its eventual recovery. The course the Greek ruling classes took made Greece take, not medicine, but poison, for the foreseeable future.
The “first priority of the ‘troika’ has been to protect the lenders from losses and the Eurozone from the threat of a major rupture, as the IMF has openly admitted…. Greece had to be prevented from defaulting and exiting the EMU, while submitting to a programme along the lines of the Washington Consensus.”[58] To pre-empt any independent course, the IMF and EU arranged a €73 billion ‘bail-out’ package for Greece. In fact, the bail-out package served to pay back the European private banks which had lent money to Greece. In this fashion Greece’s creditors shifted from private banks to public institutions, which made default much more difficult in international law.
A sovereign state could always default, assuming that the country would be prepared to shoulder the cost of legal proceedings and its exclusion from the financial markets for a period…. In the case of Greece there is undeniable evidence that the IMF was fully aware of the importance of devaluation and debt restructuring already in 2010. However, EMU [European Monetary Union] membership made formal devaluation impossible and debt relief was bluntly rejected by Eurozone lenders. Thus, the IMF laid great stress on “internal devaluation” pivoting essentially on wage reductions…. By its own admission, the IMF ignored its own research and simply kowtowed to political pressure from the lenders to Greece, who were among its major shareholders. In 2010, a Greek default, or even major debt restructuring, and Greek exit from the EMU would have posed grave risks for the banks of the lenders but also for the very survival of the monetary union. From the perspective of the lenders, Greece had to be kept in the EMU. It also had to bear the brunt of the adjustment without debt restructuring or devaluation. The EMU had placed the country in an iron cage and the results would soon show.[59]
The IMF, the European Commission (EC), and the European Central Bank (ECB), which collectively came to be known as the ‘Troika’, provided in all three ‘bail-outs’ for Greece till 2018, and supervised a harsh austerity programme for Greece: cuts in Government expenditure, large scale retrenchments, increases in taxes on consumption, and privatisations.
To put it more simply, the Troika’s programme meant that Greece would service its debt in the following ways: (i) reducing wages steeply, so that people consumed less of output; (ii) turning over that ‘saved’ output to foreign lenders; and (iii) handing over Greece’s precious assets to foreign lenders at depressed prices.
Through these measures, an unprecedented 11 per cent of GDP was to be squeezed out from the Greek people to service loans. Of this, 9.2 per cent was to be extracted immediately, a process known as “front-loading” (according to the IMF, “Strong frontloading is expected to minimize implementation risk, avoid adjustment fatigue, and rebuild confidence swiftly”). The IMF stated:
Expenditure measures are estimated at 5.2 percent of GDP. The elimination of the Easter, summer, and Christmas pensions and wages, as well as cuts in allowances and high pensions are frontloaded and will, by themselves, yield 2 percent of GDP of the 11 percent total package. Other expenditure cuts involve employment reductions, cuts in discretionary and low priority investment spending, untargeted social transfers, consolidation of local governments, and lower subsidies to public enterprises.
Revenue measures add another 4 percent of GDP to the package. This includes an increase in the standard VAT rate from 21 to 23 percent and the reduced rate from 10 to 11 percent, moving lower taxed products such as utilities, restaurants and hotels to the standard VAT rate, and increasing excises on fuel, cigarettes, and tobacco to bring them in line with EU averages. Those measures yield 2.1 percent of GDP.[60]
The result was a catastrophic decline in Greece’s economy. Demand collapsed. GDP declined by 25 per cent between 2009 and 2016, and even in 2019 was 21 per cent lower than a decade earlier.
Meanwhile, the public debt increased by about 10 per cent, from €301 billion to €331 billion between 2009 and 2019 (see chart below).
Source: Compiled from Statistical Data Warehouse, European Central Bank, http://sdw.ecb.europa.eu/
However, the burden of the debt is not reflected simply in the absolute figure of debt. A debt of Rs one lakh may be sustainable for a farmer who can sell his/her crop at a good price, but it becomes an unbearable burden if crop prices crash. What matters is thus the debt as a ratio of the debtor’s income. In the case of Greece, its debt/GDP ratio rose by 50 percentage points over the decade: from 127 per cent in 2009 to 177 per cent in 2019. Why? Not principally because of the growth of debt, but because Greece grew dramatically poorer over the course of the austerity programme. The GDP declined by 21 per cent, from €238 billion to €187 billion. An international team of leading ‘mainstream’ economists termed this “an output collapse unprecedented in the annals of modern Europe”.[61]
Not only economists, but any layman, can understand perfectly well the concept of ‘debt dynamics’, namely, that if the interest rate on debt is higher than the growth rate of income (in the case of a nation, its GDP growth rate, on which depends the growth of tax revenues), the debtor will sink deeper into debt. In Greece’s case the growth rate of GDP is negative.
The IMF projects that Greece will return to its 2010 GDP in 2034 (see dotted line in the chart below), the sort of fantasy projection that can only be made by IMF economists.[62]
Source: IMF 2019. “t+3”, “t+6”, etc, refer to the number of years from the starting point. The peak GDP before the crisis is taken as 100, and the remaining years are mapped as ratios of that peak GDP. As can be seen, the Greek crisis finds no parallel.
In fact, the leading economies did not lose money as a result of the Greek crisis; their gain due to the reduction in their own borrowing costs (as international investors in government bonds shifted from Greece and other weak economies to dominant economies like the US, UK, Japan and Germany) outweighed the amount they provided toward the Greek bail-outs.[63] Thus they would remain net gainers even if they were never repaid a cent. Nevertheless, in exchange for the bail-outs they imposed a regime of austerity on Greece in perpetuity: The EU’s plan for Greece’s rehabilitation envisions that it will continue to generate primary budget surpluses[64] of 3.5 per cent of GDP till 2023 and then 2 per cent of GDP from then to 2060(!).[65] Thus future generations of Greeks are to remain in debtors’ prison.
In 2010, the IMF confidently projected that, once Greece submitted to the IMF and EU,
Real GDP growth is expected to contract sharply in 2010–11 and recover thereafter. Growth is expected to follow a V-shaped pattern: the frontloaded fiscal contraction in 2010–11 will suppress domestic demand in the short run; but from 2012 onward, confidence effects, regained market access, and comprehensive structural reforms are expected to lead to a growth recovery.[66]
It is worth keeping in mind that Indian officials today too predict a “V-shaped recovery”.
At the IMF Board meeting in 2010 which decided on the Greek bailout, many countries were opposed, and thought debts should be cancelled instead. However, these were Third World countries, who carried little weight:
Most strikingly, drawing on their own experience of failed bailouts in the late 1990s and early 2000s, Argentina argued that a “debt restructuring should have been on the table”. Brazil said the IMF loans:“may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”. Iran said it would have expected a debt restructure to be discussed, as did Egypt, which said the IMF’s growth projections were “optimistic”, a word repeated by China.[67]
Particularly interesting, from our point of view, was the view of India’s representative at the board meeting:
India warned that the scale of cuts would start a spiral of falling unemployment which would reduce government revenue, causing the debt to increase, and making a future debt restructuring inevitable.[68]
When we discuss India’s current policy, we can look back at this pertinent advice.
In 2010, the IMF anticipated that GDP by 2013, at €235 billion, would exceed 2010 levels (€231 billion). However, by 2013, the Greek economy had in fact shrunk 20 per cent. In 2013, IMF economists acknowledged that they had grossly underestimated the impact that government spending cuts and tax hikes would have on economic activity, employment and investment in those European countries which were subjected to austerity programmes.[69] The outstanding example of this was Greece. However, this research finding brought no relief to Greece. Its austerity programme continued on the basis of the earlier (and now invalidated) forecasts. In 2013 the Troika forecast that Greece’s public debt/GDP ratio would fall to 124 per cent by 2020 – underestimating the eventual figure by over 50 percentage points.
As the explicitly intended result of the Troika programme, Greece’s wage levels declined steeply: private sector nominal wages decreased by about 20 per cent from 2010. But the promised ‘pay-off’ from this horrendous sacrifice never came. The drop in wages was meant to lead to a growth in jobs, since workers were now cheaper; but instead, as the IMF acknowledges, “Greece continues to have the highest rate [of unemployment] in the Euro Area, with long-term unemployment [as a percentage of total unemployment] persistently above 60 percent for the last five years and youth unemployment at 40 percent (also the highest in the region).”[70]
The combination of falling wages and rising unemployment meant greater poverty. The IMF notes that “working age Greeks face greater ‘at risk of poverty’ than pensioners”. It recommends reducing old-age pensions as a way of overcoming this anomaly, so that pensioners can join the young in poverty.[71] Indeed, pension cuts are a key element to the ‘reform’ measures IMF is pressing on Greece.
According to OECD measures, poverty in Greece doubled between 2009 and 2018.[72] The World Bank puts ‘multidimensional poverty’ in Greece at 31.8 per cent in 2018.[73]
Greece for sale
A key objective of the EU has been to push through the privatization programme. This is done in the name of reducing the debt: thus European Commission president Jean-Claude Juncker said in 2015 that Greece could make €50 billion from asset sales.[74] At the European Union summit in July 2015, German Finance Minister Schauble rejected Greece’s offer of raising €500 million through privatizations every year, and told the media, “I said €50 billion, €50 billion!”[75]
However, it was pure fiction that privatization would ever reduce Greece’s debt. According to the IMF, between 2008 and 2018, Greece’s privatization proceeds contributed a reduction of the public debt by 1.3 per cent. The IMF projects that between 2019 and 2028 privatization would contribute to reducing the public debt another 1.2 per cent.[76] Hence the purpose of privatization is not to reduce the debt; rather the debt is the lever to force Greece to part with its assets, and yield a jackpot for foreign investors.
Privatization will necessarily be at undervalued, depressed prices. Firstly, these sales are being carried out in distress conditions, when the seller is under pressure to meet certain targets, but the buyers are under no such pressure to buy. In order to ensure the ‘success’ of the sale, the sellers deliberately undervalue the asset. Secondly, there is no real competitive bidding. Domestic firms are in no financial condition to bid, and international bidders for such large assets are few. Thirdly, as we shall see, the beneficiaries have their representatives on the very agency doing the selling.
After 2010, the Greek government recapitalised the country’s four major private banks, the National Bank of Greece, Piraeus Bank, Alpha Bank, and Eurobank, using public funds. On this basis it was logical to have nationalised them. Instead their shares were sold at “ridiculously low” prices[77] to US and other foreign hedge funds (i.e., speculative investment funds).
As a result public ownership of banks has been dramatically reduced, the public sums previously given to banks for recapitalisation have effectively evaporated, and international hedge funds have acquired significant equity stakes in Greek banks. Under these conditions it is highly unlikely that there would be a strong revival of bank credit in the foreseeable future.[78]
Thereafter, the four banks have been selling the ‘non-performing loans’ (NPLs, i.e., bad debt) since 2017. The buyers of the loans would get control of the assets of the borrowers. This was the next act of denationalization:
The bank privatization facilitated the seizure of private property of Greek businesses through the “red loans” and securities held by the banks…. Small and medium enterprise seizures came next, and included primary residences,[79]
– that is, people’s homes too were seized. A US State Department website on the investment climate in Greece says that “The potential sale and/or transfer of Greek non-performing loans continues to receive interest by a large number of Greek and foreign companies and funds.”[80]
In 2011, the Greek government set up the Hellenic Republic Asset Development Fund (HRADF), and turned over to it listed and unlisted state-owned enterprises, infrastructure (including 35 ports, 40 airports, and the natural gas company), buildings, ports, 3,000 pices of real estate, national monuments, national roads, and the military industry. However, the EU was dissatisfied with the progress of the HRADF. As a condition of the 2015 bail-out the Hellenic Corporation for Assets and Participation (HCAP) was set up, with a lifespan of 99 years, and all assets of the HRADF were turned over to it. The board of HCAP consists of three persons nominated by the Greek government, and two, including the chairperson, selected by the EU and the European Stability Mechanism (ESM). The foreign lenders are now satisfied that privatization is moving ahead, with the privatization of ports at Piraeus and Thessaloniki, 10 regional ports and marinas, and the 14 busiest airports in the country. The sale of power corporation units, the natural gas company, and Greece’s biggest highway are reportedly underway.
One example suffices to illustrate the process underway. The Fraport consortium, headed by the German airport Frankfurt, will pay €1.23 billion for Greece’s 14 busiest regional airports; this amounts to the net income the Greek government gets from these airports in just three years. (Minus the expenditure recently incurred by the Greek government on these airports, the sale money will amount to just €714 million.) In 40 years, the Fraport consortium is projected to earn €22 billion from these airports, but pay a rental of €3.85 billion to Greece.[81]
[1] The following is a simplified example of what foreign investors fear:
(1) Let us say a foreign fund invests $1 million in the Indian share market at a time when $1 = Rs 70. It buys shares for Rs 70 million, i.e. Rs 7 crore. The share prices rise over time, and now the foreign fund’s shares are worth Rs 8 crore, i.e. Rs 80 million.
(2) But meanwhile, let us say, Government spending has had the effect of pumping out a lot of money chasing the same number of goods in the market, and this has caused inflation to rise by 14 per cent.
(3) Indians, now flush with cash thanks to Government spending, import more goods. But Indian exports have become more expensive, and cannot compete in the world market.
(4) As a result there dollars become scarce on India’s foreign exchange market. Accordingly, the rupee’s value vis-a-vis the US dollar falls to $1 = Rs 80.
(5) If, at this point, the foreign fund decides to sell its shares and take the money out, it will get Rs 80 million for them; it will convert this into dollars at Rs 80 = $1, and get exactly $1 million back. It will not have made any profit. Inflation would have wiped out all the foreign investor’s gains.
In reality, neither is inflation in India mainly caused by growth in money supply, nor is the rupee’s value determined by trade, but by capital movements. The above example nevertheless illustrates foreign investors’ fears.
[2] Government spending can lead to inflation if it causes excess demand, i.e. if the economy is working at the peak of its productive strength, without unemployed labour or unutilised industrial capacity. Whereas in India, even before the Covid-19 crisis, there was large unemployment, and nearly a third of industrial capacity lay idle. And after March, there is a collapse of economic activity, employment, and demand for goods.
No doubt, the prices of specific commodities may rise if their supply stops because of the lockdown. However, in such conditions, the Government would need to ensure supply through its own direct action, which would require additional spending. So the austerity regime would in fact aggravate such individual pockets of price rise.
[3] The report noted: “In times like these, the so called “super rich” have a higher obligation towards ensuring the larger public good. This is for multiple reasons – they enjoy a higher capacity to pay with significantly higher levels of disposable incomes compared with the rest, they have a higher stake in ensuring the economy springs back into action, and their current levels of wealth itself is a product of the social contract between the state and its citizens. Most high-income earners still have the luxury of working from home, and the wealthy can fall back upon their wealth to cope with the temporary shock.”
Therefore they proposed a moderate, temporary increase in income tax rates for the super-rich; alternatively, re-introduction of a tax on their wealth; as well as re-introduction of inheritance tax on the wealthy (in developed countries, the rates of inheritance tax are as high as 55 per cent). Further, they proposed increased taxes on higher income foreign companies having a permanent establishment in India; and increased taxes on foreign businesses which earn through advertisement and services (this is popularly known as the ‘Google tax’, and it would also apply to services such as Netflix, Amazon Prime, Zoom, etc. “The increased business of these e-commerce/online streaming/web services companies provides an opportunity to increase the said tax rates by 1%, i.e. from 6% to 7% for ad services, and from 2% to 3% for e-commerce.”
To these exceedingly mild proposals, the Government responded with unprecedented alacrity and vindictiveness. Four institutions – the Finance Ministry, the Central Board of Direct Taxes, the Indian Revenue Service Association, and the Income Tax Department – immediately disavowed the report, and an inquiry was instituted against the 50 IRS officers associated with the report. According to sources in the Finance Ministry, this effort was an act of “indiscipline”, as “the government is doing its best to provide relief and liquidity into the system and ease the lives of people in these trying times”.
[4] R. Nagaraj, “India’s Dream Run, 2003-08: Understanding the Boom and Its Aftermath”, Economic and Political Weekly, May 18, 2013.
[5] As the supply of dollars increases in the foreign exchange market, the rupee’s value tends to rise. This would have a harmful impact on Indian producers, since imported goods would become cheaper in rupee terms, and Indian exports would become more expensive in dollar terms. Hence, in response to a rise in inflows, the RBI intervenes to buy up the dollars, which it adds to its foreign exchange reserves. In exchange for these dollars, the RBI pays rupees. These rupees end up in the banks. Hence the banks have additional funds with which to lend.
[6] The higher share prices rise, the heftier the premium (over the face value of the share) that companies can charge when raising money from the public through fresh share issues.
[7] K. C. Chakrabarty, “Infrastructure Financing by Banks in India: Myths and Realities”, RBI Bulletin, September 2013.
[8] Gajendra Haldea, “Subprime Infrastructure: Crony Capitalism in Public Sector Banks”, August 2015, http://www.gajendrahaldea.in/download/Sub-prime_Infrastructure_Crony_capitalism_in_Public_Sector_Banks.pdf
[9] Although much of this ‘success’ can be explained by the fall in international oil prices, which was no achievement of the Government.
[10] https://ppi.worldbank.org/content/dam/PPI/documents/private-participation-infrastructure-annual-2019-report.pdf
[11] V. Narayanan, “India Inc increasingly looks abroad for funds”, Hindu Business Line, October 8, 2019, https://www.thehindubusinessline.com/economy/ecbs-for-working-capital-needs-rise-10-fold-in-h1-fy20/article29620006.ece
[12] Radhika Pandey and Amrita Pillai, “Covid-19 and the MSME sector: The ‘identification’ problem”, Ideas for India, April 20, 2020. https://www.ideasforindia.in/topics/macroeconomics/covid-19-and-the-msme-sector-the-identification-problem.html
[13] National Sample Survey, 73rd Round, Unincorporated Non-agricultural Enterprises (Excluding Construction), 2015-16.
[14] Akshay Deshmane, “Indian Economy In Recession Thanks To Demonetisation, Says Economist Arun Kumar”, Huffington Post, November 13, 2019, https://www.huffingtonpost.in/entry/indian-economy-recession-demonetisation-black-money_in_5dc53e34e4b00927b231296c
[15] RBI, Report of the Expert Committee on the Micro, Small and Medium Enterprises Sector, June 2019.
[16] Pandey and Pillai, op. cit.
[17] Namrata Acharya, “MSMEs forced to approach moneylenders as PSBs steer clear despite Government push”, Business Standard, May 6, 2019.
[18] RBI, Report of the Expert Committee, p. 22.
[19] https://thewire.in/business/unpaid-dues-to-msme-sector-may-be-over-rs-5-lakh-crore-says-gadkari
[20] Procurement by Central public sector enterprises from MSMEs in 2017-18 was less than Rs 25,000 crore. – RBI, Expert Committee, p. 20.
[21] Mahesh Vyas, “An ominous confluence”, https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2020-01-14%2012:06:19&msec=953&ver=pf.
[22] Namrata Acharya, op. cit.
[23] Rathin Roy, “A silent fiscal crisis?”, Business Standard, July 6, 2019.
[24] V. Sridhar, “Dystopian pipe dream”, Frontline, May 22, 2020. https://frontline.thehindu.com/cover-story/article31545416.ece?homepage=true
[25] Ibid.
[26] As Vyas points out, India’s labour force participation rate – i.e., the percentage either employed or seeking work – is about a third less than the global average of 66 per cent. Employment levels are less than 40 per cent. “Surveying India’s unemployment numbers”, Hindu, February 9, 2019. https://www.thehindu.com/opinion/lead/surveying-indias-unemployment-numbers/article26218615.ece
[27] RBI, International Investment Position of India, end-December 2019.
[28] Motilal Oswal, “India Strategy”, May 27, 2020.
[29] Surajeet Das Gupta and Sachin Mampatta, “Foreign investors picking controlling stakes in companies on the rise”, Business Standard, June 8, 2019.
[30] Alvarez and Marsal, “India’s M&A and Distressed Opportunity Landscape”, Confederation of Indian Industry, September 2019.
[31] Nagaraj, “India’s Dream Run”.
[32] Ridhima Saxena, “PE funds increasingly look for buyout deals in India”, Mint, May 12, 2019. .
[33] Lalatendu Mishra, “Foreign funds ‘take over’ Indian road assets”, Hindu, September 18, 2019. https://www.thehindu.com/business/foreign-funds-take-over-indian-road-assets/article29452321.ece
[34] Andy Mukherjee, “Private equity spots profit in India’s distress”, Bloomberg, November 8, 2019
[35] Alvarez and Marsal, op. cit.
[36] Boston Consulting Group, “The $75 Trillion Opportunity in Public Assets”, 2018. Regarding their role as advisors to the Indian government on Covid, BCG admits: “We don’t claim we are epidemiologists. But we certainly know what crisis reforms should be.” https://www.ndtv.com/india-news/coronavirus-us-based-boston-consulting-groups-mystery-role-in-indias-war-against-covid-19-2236545
[37] Pallavi Pengonda, “With interest already high, govt should make most of BPCL sale”, Mint, December 2, 2019.
[38] We take as the base the prices on the date the Survey says the “first news” of BPCL’s privatisation appeared, namely, September 13, 2019, on the basis of which BPCL’s share price rose. The price today (June 2, 2020) of the BPCL share is 84 per cent of the base price; HPCL is 72 per cent of the base price. The difference is not sizeable.
[39] Rounak Jain, “India may have to sell BPCL shares for less than the best price as the government needs money”,
Business Insider, May 28, 2020.
[40] Here we are not going into the basic arguments against privatisation, namely, that under the existing economic system the public sector is meant to do what ‘market forces’ – the private sector – have failed to do. And hence privatisation amounts to an attack on the established social claims of the people in favour of large capital. The argument here is limited to showing the extent of bounty received by foreign capital (and a few native large capitalists).
[41] Pallavi Pengonda, “With interest already high…”
[42] C.P. Chandrashekhar, “Reliance and Facebook: Seeking pathways to profit”, International Development Economics Associates, May 7, 2020, https://www.networkideas.org/news-analysis/2020/05/reliance-and-facebook-seeking-pathways-to-profit/. The Canadian PE fund Brookfield in 2019 bought the RIL-owned East-West gas pipeline for Rs 13,000 crore. https://www.business-standard.com/article/companies/brookfield-to-acquire-ril-s-east-west-pipeline-for-rs-13-000-crore-119031500044_1.html.
[43] James Crotty, Kang-Kook Lee, “Was the IMF’s Imposition of Economic Regime Change in Korea Justified? A Critique of the IMF’s Economic and Political Role in Korean During and After the Crisis” Political Economy Research Institute (PERI) Working Papers series, no. 77, 2004.
[44] Jomo K. S., “East Asia: From Miracle to Debacle and Beyond?”, 2002, https://www.networkideas.org/feathm/oct2002/Jomo.pdf
[45] Crotty, Kang-Kook Lee, op. cit.
[46] Ibid.
[47] Kang-Kook Lee, “Neoliberalism, the financial crisis, and economic restructuring in Korea”, in Jesook Song, ed., New Millennium Korea: Neoliberal capitalism and transnational movements, 2011, p. 36-8.
[48] Ibid.
[49] Ibid.
[50] Ibid.
[51] Crotty and Lee, op. cit.
[52] Jacques-chai Chomthongdi, “The IMF’s Asian Legacy”, Global Policy Forum, 2000
https://www.globalpolicy.org/component/content/article/209/42924.html
[53] Kwang-Yeong Shin, “Globalisation and the Working Class inSouth Korea: Contestation, Fragmentation and Renewal”, Journal of Contemporary Asia, May 2010. https://www.asianstudies.su.se/polopoly_fs/1.257189.1448266491!/menu/standard/file/Globalisation%20Kwang-Yeong%20Shin.pdf
[54] Akira Suehiro, “Family Business Gone Wrong? Ownership Patterns and Corporate Performance in Thailand”, ADB Institute, Working Papers no. 19, 2001, https://www.adb.org/sites/default/files/publication/157194/adbi-rp19.pdf
[55] Suehiro, op. cit.
[56] Labros S. Skartsis, “Media Coverage of the 2010 Greek Debt Crisis: Inaccuracies and Evidence of Manipulation”, 2014https://www.academia.edu/6655991/Media_Coverage_of_the_2010_Greek_Debt_Crisis_Inaccuracies_and_Evidence_of_Manipulation
[57] IMF, Greece: Staff Report on Request for Stand-by Arrangement”, May 2010. https://www.imf.org/external/pubs/ft/scr/2010/cr10110.pdf
[58] Costas Lapavitsas, “Political Economy of the Greek Crisis”, Review of Radical Political Economics, 2019.
[59] Lapavitsas, op. cit.
[60] IMF, 2010, op. cit.
[61] Barry Eichengreen, Emilios Avgouleas, Miguel Poiares Maduro, Ugo Panizza, Richard Portes, Beatrice Weder di Mauro, Charles Wyplosz, Jeromin Zettelmeyer, Independent Report on the Greek Official Debt, Centre for Economic and Policy Research, Policy Insight no. 92, 2018.
[62] IMF, “Greece: Article IV Consultation”, November 2019.
[63] Greece’s crisis came at a fortuitous time for advanced economies such as the US, UK, Germany and Japan, which had embarked on large government borrowing programmes to revive their economies in the wake of the Great Financial Crisis. When the panic emerged in 2010 over the Greek public debt, international financial investors began selling off their Greek government bonds. They sought to shift their investments to ‘safe havens’ – the Government bonds of countries which would never default, strong economies such as the four named above. This ‘flight to safety’ meant that, with many investors rushing to buy government debt of strong economies, the effective interest rate on such government debt fell, even as the interest rate on Greek government bonds soared. As a result, the strong economies enjoyed vast savings on their government borrowings. A study noted:
“Any time there was bad news about Greece, yields [effective interest rates] on German government bonds fell, and any time there was good news about Greece, German government bond yields rose…. the savings of the German budget are estimated to be more than € 100 billion (or in excess of 3 per cent of GDP) during the course of 2010 to 2015…. By most accounts, Germany’s share in the bailout package… amounts to no more than € 90 billion…. Hence, in case Greece defaults on its debts… the maximal uncertain and future costs of bailing out Greece to Germany are smaller than the benefits already accrued to the German budget.”
— Reint E. Gropp, “Germany benefited substantially from the Greek crisis”, Halle Institute for Economic Research, https://www.iwh-halle.de/nc/en/press/press-releases/detail/germany-benefited-substantially-from-the-greek-crisis/. Also see Skartsis, op. cit.
[64] A primary budget surplus is government revenues minus government expenditure (excluding interest payments).
[65] Eichengreen et al., op. cit.
[66] IMF, 2010 op. cit.
[67] Jubilee Debt Campaign, “Six key points about Greek debt and the forthcoming election”, January 2015.
[68] Ibid.
[69] Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers”, IMF Working Paper, 2013. https://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf
[70] Ibid.
[71] IMF, “Greece: Article IV Consultation”, p. 13.
[72] OECD Economic Surveys: Greece. April 2018.
[73] World Bank, Multidimensional poverty headcount ratio, Greece, 2018,
https://data.worldbank.org/indicator/SI.POV.MDIM?locations=GR
[74] “Delayed Greek asset sales pick up steam as bail-out approaches end”, Financial Times, June 5, 2018.
[75] Verena Nees, “Television programme shows how German companies benefit from privatisation programme in Greece”, World Socialist Website, July 30 2015.
[76] IMF, “Greece: Article IV Consultation”, p. 58.
[77] Eleni Portaliou, “Greece: A Country for Sale”, Jacobin, September 12 2016.
[78] Lapavitsas, op. cit.
[79] Portaliou, op. cit.
[80] “2019 Investment Climate Statements: Greece”, https://www.state.gov/reports/2019-investment-climate-statements/greece/
[81] Portaliou, op. cit.
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