Capital

in
Crisis

Arindam Sen An IIMS Publication

 Capital in Crisis: Causes, Implications
and Proletarian Response
by Arindam Sen

An IIMS Publication

February 2009

Price: Rs. 10

Published by:
Indian Institute of Marxist Studies (IIMS)
U-90 Shakarpur
Delhi - 110092
Phone: 91-11-22521067

Printed at:
AS Offset Printers, Luxminagar, Delhi - 110092

Front cover photo: Workers' sit-in at the Republic Windows and Doors in
Chicago, Illinois, December 2008.
Capital in Crisis

Causes, Implications
and Proletarian
Response

Arindam Sen

An IIMS Publication
For many a decade past, the history of industry and com-
merce is but the history of the revolt of modern produc-
tive forces against modern conditions of production,
against the property relations that are the conditions for
the existence of the bourgeois and of its rule. It is enough
to mention the commercial crises that, by their periodical
return, put the existence of the entire bourgeois society
on its trial, each time more threateningly. In these crises,
there breaks out an epidemic that, in all earlier epochs,
would have seemed an absurdity - the epidemic of over-
production. Society suddenly finds itself put back into a
state of momentary barbarism And why? Because there
is too much civilisation, too much means of subsistence,
too much industry, too much commerce. And how does
the bourgeoisie get over these crises? On the one hand,
by enforced destruction of a mass of productive forces;
on the other, by the conquest of new markets, and by the
more thorough exploitation of the old ones. That is to say,
by paving the way for more extensive and more destructive
crises, and by diminishing the means whereby crises are
prevented.
-- The Communist Manifesto (1848)

The contradictions inherent in the movement of capital-

ist society impress themselves upon the practical bour-
geois most strikingly in the changes of the periodic cycle,
through which modern industry runs, and whose crown-
ing point is the universal crisis. That crisis is once again
approaching, although as yet but in its preliminary stage;
and by the universality of its theatre and the intensity
of its action will drum dialectics even into the heads of
the mushroom-upstarts of the new, holy Prusso-German
empire.
-- Karl Marx, 1873 (Afterword to the second German edition of Capital Volume I)
 Contents

Collapse of the Colossus 7

World Recession despite Bailouts 11

Understanding the Credit System 15

Beneath the Surface Froth: Marx on Crisis 20

Overaccumulation and the Current Crisis 27

Long Term Implications and Proletarian Response 31

Appendices

Timeline of Trouble 40

Glossary 43

Looking Back 47
Global social unrest in the wake of melt-down (Indian Express, 3 Feb. 08)
 Collapse of the Colossus

Capitalism has learned to live with crises and through crises; but some
of them are epochal. Such was the Great Depression (GD) of 1930s. Will
the one that is currently unfolding prove to be another?
Take a look at the timeline of disaster appended at the end of the pam-
phlet. You will see how it started as a mild drizzle and high wind back in late
2006 and gradually gained strength to become a gale storm. No developed
country was spared, none of the numerous measures taken by the Bush
Administration and financial authorities of the G-7 over more than a year
worked, and in late 2008 something like a category five hurricane devas-
tated the world of high finance. Veteran Nobel laureate Paul Samuelson
had good reason to observe, "This debacle is to capitalism what the fall of
the USSR was to communism."

Proximate Causes

Fannie and Freddie

To put it very simply, titans like Lehman Brothers, AIG Insurance, Fan-
nie Mae and Freddie Mac failed because at the hour of need they could no
longer raise money from the market to roll over their short-term debt.
Being over-exposed to the sub-prime mortgage market and relying too
much on derivatives -- instruments derived from the performance of some
distant assethence the generic name derivatives -- they suffered huge
losses and lost the trust of the market. Investors became reluctant to lend
money even to these prestigious financial institutions. Failing to meet their
obligations, essentially they went bankrupt, though in most cases they were
rescued by the government.
The "sub-prime mortgage market" or "sub-prime loans" refer primarily to
housing loans to those who could hardly afford them and in which the initial
interest rate was sub-prime (very low) to begin with, but escalated over the
duration of the mortgage on the assumption that as the borrower progressed
career-wise there would be an increased capacity to pay instalments. The
sub-prime loan instruments were then "diced and sliced" (i.e. mixed up
with other more viable loans) and the resultant derivatives were sold on by
the original mortgage institutions to other banks and financial institutions.
Thus emerged a shadow banking system. The new breed of derivatives
7
 generated by dicing and slic-
ing of sub-prime and other
risky loans were expected
to distribute the risks among
many financial institutions
and thereby minimise the
risks shouldered by each.
This strategy allowed fin-
anciers to circumvent regu-
lations and generate easy
credit by taking high risk
bets and offloading the risks
on to others. When, with the
collapse of the housing bubble and an avalanche of defaults by sub-prime
borrowers, the 'bets' began to go wrong, the pyramid of deals began tumbling
down. More than once during 2007 and 2008 the US government sought
to stem the tide by helping indebted homeowners, but in vain. The whole
process snowballed and led to the September 2008 debacle followed by
generous bailouts.
Strange as it may seem now, the high risk strategy involving excessive
sub-prime loans and an endless web of securitisation or derivatives-creation
was not restricted or regulated by any public or private authorities. Rather,
this strategy was praised as a sure way to prosperity -- both for the firm and
for the country. Announcing its 2005 Annual Awards -- one of the securities
industry's most prestigious awards the International Financing Review
(IFR) said, "[Lehman Brothers] not only maintained its overall market pres-
ence, but also led the charge into the preferred space by ... developing
new products and tailoring transactions to fit borrowers' needs.... Lehman
Brothers is the most innovative in the preferred space, just doing things you
won't see elsewhere."
Yes, Lehman became too smart and that's why it met the fate it did, call-
ing back the memory of Nobel-prized Long Time Capital Management (see
section "Explosion of Credit and Speculation Today"). Similarly, the US as
the leader of the global North blazed the trail in these "innovative" activities,
reaped the highest profits for some years and is now paying the highest
price for economic adventurism.

Aftershock: Madoff's Ponzi scheme

The weeks-long earthquake was followed by an aftershock that was
mild in dollar terms but took a heavy toll of confidence and legitimacy.
8
Wall Street broker Bernard
(Bernie) Madoff, former
president of NASDAQ, re-
cently confessed to pulling off
the biggest fraud in history, a
$50 billion dollar scam. For
almost four decades he built
up a clientele that included
many multi-millionaires and
billionaires from Switzerland,
Israel and elsewhere, as well
as the USs largest hedge
funds. To put up a veneer of
genuineness, Madoff imposed rigorous conditions on potential clients, such
as recommendations from existing investors. Madoffs standard message
was that the fund was closedbut because they came from the same
background (board members of Jewish charities, pro-Israel fund raising
organizations or the right country clubs) or were related to a friend, or ex-
isting clients, he would take their money. He embezzled the entire money,
and paid the returns due to the old investors from new cash flow. He only
dealt with a limited clientele of multi-millionaires and billionaires who kept
their funds in for the long haul; the occasional withdrawals were limited in
amount and were easily covered by soliciting new funds from new investors
fighting to have access to Madoffs money management.
Bernard Madoffs game plan is called Ponzi scheme after Charles Ponzi,
an Italian-born American immigrant who promoted an investment plan in
1918-1920 that traded postal coupons. Rather than paying investors from
legitimate investment returns, Ponzi used to pay out early investors with
money collected from new investors. He was found guilty and imprisoned
in 1920. In Madoff's case the rug-pulling was provided by the huge losses
suffered by some of his clients in other, i.e., non-Madoff investments in the
wake of the financial crisis. When many of these clients sought to sell some
of their apparently performing Madoff assets to help offset other losses, the
scam exploded.
Madoffs long-term, large-scale fraud was not detected by the Securities
and Exchange Commission (SEC) despite its claims of at least two investi-
gations. As a result, there is a total loss of credibility of this watchdog. The
swindle has further eroded confidence in the markets. It has drawn as much
anger for the money lost as for the fact that the worlds smartest swindlers
on Wall Street were completely taken by one of their own. Their self-image
that they are so rich because they are so smart was utterly shattered.

9
 But the most serious impact of the revelation lies in the growing awareness
that the United States government too manages its finances largely on the
Ponzi principle. Since 1985 it has been importing more than it exports. That
is to say, as a nation it consumes more than it earns. The fallout is that for
years on end its national debt has been soaring. As existing debt matures,
these are repaid by issuing new debt, i.e., US Treasury Bills. Interest pay-
ments on existing debts are also made by selling new debt to investors.
If as happened with Madoff a large number of US creditors want their
money back, the era of American "deficits without tears" will come to an end.
In such a scenario, the worlds biggest debtor -- just like Orange County
(US) in 1990s and Iceland recently runs the risk of bankruptcy.

(Acknowledgement: this section is partly based on Bernard Madoff:

Wall Street Swindler Strikes Powerful Blows for Social Justice by James
Petras, available on his website)

10
 World Recession despite
Bailouts
A total meltdown has been prevented well, for now. But thanks to
highly efficient networking by IT-enabled services and thorough integration
of financial markets, the contagion spread at electronic speed all across
the planet and soon affected the real economy too. Financial institutions, in
the US and Europe in particular, still have no idea of what they are sitting
on. That is to say, they do not have any estimate of the reliability of their
assets base, which include unknown but large quantities of toxic securities.
This has led to a reluctance of banks to lend to each other and to private
individuals or firms. Liquidity in the real economy has thus dried up leading
to a slowdown, which is further aggravated by declining consumption on
the part of US citizens shaken by foreclosures and end of credit-dependent
spending spree. And thanks again to successful globalisation, (in the sense
of capital's success in the "conquest of new markets and... more thorough
exploitation of the old ones") this time around there is no country like the
erstwhile Soviet Union to escape from the grip of crisis.

Depression Economics
The National Bureau of Economic Research in US has recently an-
nounced that a contraction had actually begun in December 2007. At 12
months, the recession is already the longest since the 16-month slump that
ended in November 1982. The US economy shed 533,000 jobs in November
-- the largest monthly job loss since December 1974 -- bringing the year's
total to 1.9 million. The latter figure surpasses the 1.6 million jobs lost in
the 2001 recession. The extreme volatility of commodity prices in world
trade in the recent past was an important indication of the turbulence in the
global economy.
According to a survey published in December 2008 by the Chinese
Ministry of Human Resources and Social Security, more than 10 million
migrants are out of work. A recent public security report published by the
Chinese Academy of Social Sciences (CASS) said that the global financial
crisis has caused the closure of 670,000 small- and medium-sized firms in
China, many of them labour-intensive ones based in coastal regions. Since
September, the number of minor criminal cases in the Yangtze and Pearl
river deltas was up 10 per cent on the same period of 2007. The first half of
this year might well see more social unrest triggered by the financial crisis,
11
the report said. President Hu Jintao and Premier Wen Jiabao have called on
officials to maintain social stability and help cope with the financial crisis.
World trade is projected to fall next year for the first time since 1982
and capital flows to developing countries predicted to plunge 50 per cent,
the World Bank said in a forecast released 9 November 2008. Developing
countries will grow at an average rate of 4.5 per cent next year a pace that
almost constituted a recession, given the need of these countries to grow
rapidly to generate enough jobs for their swelling populations. "You don't
need negative growth in developing countries to have a situation that feels
like a recession," said Hans Timmer, who directs the bank's international
economic analyses and projections. As the World Bank's experts struggled
to find a historical parallel to the slump, they said it had more in common
with the GD than with the severe recessions of the 1970s or 1980s.
The UNs World Economic Situation and Prospects 2009 estimates that
the rate of growth of world output which fell from 4.0 per cent in 2006 to
3.8 per cent in 2007 and 2.5 per cent in 2008 is projected to fall to -0.5 per
cent in 2009 as per its baseline scenario and as much as -1.5 per cent in
its pessimistic scenario.
Well, can we call this a depression? Given the highly sophisticated
monetary management techniques and huge levels of state intervention
extensively resorted to these days, traditional distinctions between a
recession and a depression have become largely superfluous. To avoid
unnecessary academic hairsplitting, we have used the term depression
economics after Paul Krugman to mean a broadly depression-like situa-
tion. The IMF in its November 2008 forecast said that output in advanced
economies would contract on a full-year basis for the first time since World
War II. A number of countries have already seen capital flight and currency
depreciation of such severity that they have been forced to turn to the IMF
(Iceland, Ukraine, Pakistan) or enter into emergency financial arrangements
(Hungary, South Korea).

Gargantuan Bailouts
US Treasury Secretary Ben Bernanke put up a sombre face and told
the law-makers at the peak of the September crisis that if the government
did not save the (financial) markets then there might not be any financial
markets in the future. He was speaking the truth. Bush and other hardcore
neo-cons were compelled to change their stance and agree to a bailout
package that is remarkable both for its sheer size and the opposition it
evoked. Here is an assessment given by frequent CNBC commentator,
Barry Ritholtz on his blog:

12
 2008 Bailout versus Other Large US Government Projects
It should be noted that Ritholtzs figure of $4.6165 trillion as total bailout
amount might be an understatement. According to New York Times (October
18, 2008) the all inclusive bailout figure was already "an estimated $5.1
trillion by October -- and it is growing!
As widely reported in the press, the "Emergency Economic Stabilisation
Act of 2008" was passed in the face of tremendous opposition. At one time,
calls and emails from constituencies to the Congress were running as high
as 300 to 1 against the bailout. There were many street demonstrations
too. Some 400 economists, including two Nobel Prize winners, opposed
it. The package was then 'sweetened' in the Senate by granting another
$110 billion in tax relief and renewable
energy incentives to get enough House
vote for passage.
The basic opposition against the
bailout is that it transfers huge amounts
of public money into the hands of
private financiers responsible for the
catastrophe instead of punishing them.
The message goes out that the ex-
ecutive fat cats of Wall Street can earn
themselves royal fortunes through reck-
less often illegal business practices
and then get away scot-free when their
firms go down, bringing untold miseries
to their customers. Moreover, it leads
to a spiralling public debt. Even the ac-
tual implementation of the $700 billion
bail-out of the US banking system has
already been seriously questioned by
13
the Government Accountability Office (GAO). It is being carried out without
adequate oversight and monitoring, the Congressional watchdog observed,
and added that the Treasury "has no policies or procedures in place for
ensuring the institutions... are using the capital investments in a manner
that helps meet the purposes of the Act."
As for other rich countries, by early December 2008, finance ministers from
all 27 European Union countries met to discuss proposals for a stimulus plan
totalling 200 billion Euro (250 billion dollars). At the moment central banks
in US and Europe are heading towards zero interest rates. In India a series
of stimulus packages including interest rate cuts have been announced to
arrest the pronounced downturn, with hardly any tangible results.
China too launched an economic stimulus package worth nearly $600
billion. Unlike the bailout packages in the West, here the stress is on invest-
ments in domestic infrastructure and lowering of exchange-rate. The latter
measure is vehemently opposed by the OECD countries because that will
make Chinese products cheaper and more competitive. China on its part
insists it has every right to use the exchange rate as a tool for boosting the
economy when many other countries are pushing their currencies down. It
believes that it can make the biggest contribution towards a fast turnaround
of the global economy by sustaining China's own growth in whatever way
it can.
Even after the rescue operations, credit markets are still fundamentally
broken. Economists have also pointed out that at bottom it is more a prob-
lem of solvency than a mere credit crunch. The assets of colossal financial
institutions have depreciated in a big way on account of massive fall in the
value of the loans (including securitized loans) they have advanced. There-
fore, flooding the system with debt liquidity will not help; it may indeed be
counter-productive.
When the Emergency Economic Stabilization Act of 2008 was passed, the
US Chamber of Commerce did not express any great optimism. It merely
said, "With the American economy on life support, Congress took the nec-
essary step to stop the bleeding." Well, the bleeding was indeed controlled
(not stopped altogether) but the patient's condition did not improve. Recently
in Delhi, Joseph Stiglitz likened the bailout packages to giving mass blood
transfusion to a patient who was haemorrhaging internally.

14
 Understanding the Credit
System
Today it is no longer a story of a mere "credit lock" or problems in the new
or FIRE sectors; the rot has already reached the roots of old economy.
Still, since the epicentre of the tremor and its aftershocks lies in the financial
sector and given the supreme importance of this commanding sector, our
investigation into the causes of the crisis should begin from here.

Evolution of the Credit System

At one time the role of credit of dealers in credit or financiers was
basically to grease the wheels of industry and commerce which turned out
real goods, infrastructure and services. But gradually their role expanded. In
Capital, particularly in "Book III" which discusses "The Process of Capitalist
Production As a Whole", Marx dwells at length on a vast range of subjects
like the role of credit, relation between money capital and real capital, ficti-
tious capital and speculation and so on, which are directly relevant to the
topic before us.
... [A] large portion of this money-capital, Marx says, is always neces-
sarily purely fictitious, that is, a title to value just as paper money. [Capital
Volume III, p 509] He speaks of a new financial aristocracy, a new variety
of parasites in the shape of promoters, speculators and simply nominal di-
rectors; a whole system of swindling and cheating by means of corporation
promotion, stock issuance and stock speculation and of fictitious capital,
interest-bearing paper which is enormously reduced in times of crisis, and
with it the ability of its owners to borrow money on it on the market. (Capital,
Vol. III, p 493). If this sounds contemporaneous, so would the anxiety ex-
pressed by the British "Banks committee" a predecessor of various expert
committees and monetary authorities of our day exactly 150 years ago
regarding the fact that extensive fictitious credits have been created by
means of discounting and rediscounting bills in the London market upon the
credit of the bank alone, without reference to quality of the bills otherwise.
(ibid, p 497, emphasis ours).
Junk securities, then, are no invention of our Wall Street-wallahs! In
Marx we also find the following passages which, with a bit of updating as
suggested in square brackets, may help us understand what happened in
September-October 2008:
Ignorant and mistaken bank legislation, such as that of 1844-45, can inten-
15
sify this money crisis. But no kind of bank legislation can eliminate a crisis.
In a system of production, where the entire continuity of the reproduction
process rests upon credit, a crisis must obviously occur a tremendous rush
for means of payment when credit suddenly ceases and only cash payments
have validity. At first glance, therefore, the whole crisis seems to be merely
a credit and money crisis. And in fact it is only a question of the convertibility
of bills of exchange [add here the modern credit instruments AS] into money.
But the majority of these bills represent actual sales and purchases, whose
extension far beyond the needs of society is, after all, the basis of the whole
crisis. At the same time, an enormous quantity of these bills of exchange
represents plain swindle, which now reaches the light of day and col-
lapses; furthermore, unsuccessful speculation with the capital of other people;
finally, commodity-capital which has depreciated or is completely unsalable, or
returns that can never more be realized again. The entire artificial system
of forced expansion of the reproduction process cannot, of course, be
remedied by having some bank, like the Bank of England, [today we would
perhaps say the US Federal Reserve] give to all the swindlers the deficient
capital by means of its paper and having it buy up all the depreciated
commodities at their old nominal values. Incidentally, everything here
appears distorted, since in this paper world, the real price and its real
basis appear nowhere (ibid, p 490, emphasis added).

Imperialism as Domination of Finance Capital

However, it was only with the advent of modern imperialism, a parasitic
and decaying system marked by new features like all-round monopolisation,
export of capital outweighing export of commodities, the rise of the financial
oligarchy etc. that money capital metamorphosed into finance capital and
attained a much more influential position:
Imperialism, or the domination of finance capital, is that highest stage
of capitalism in which the separation [of money capital from industrial
or productive capital] reaches vast proportions. The supremacy of finance
capital over all other forms of capital means the predominance of the rentier
and of the financial oligarchy; it means that a small number of financially
'powerful' states stand out among all the rest.
[The] twentieth-century marks the turning point from the old capitalism
to the new, from the domination of capital in general to the domination of
finance capital. (Lenin in Imperialism; emphasis added)
Now what is finance capital? Basically it is the coalescence of bank capi-
tal and industrial capital, said Lenin, and today perhaps we should include
commercial capital as well. This coalescence, however, internalises a good
amount of tensions and contradictions between the different sectors which
16
maintain their special identities and interests. Modern banks, Lenin showed,
concentrated the social power of money in their hands, and began to oper-
ate as a single collective capitalist, and so subordinate to their will not
only all commercial and industrial operations but even whole governments.
Also important in this context was the three-way personal link-up" between
industry, banks and the government.
Elaborating on the new stage, Lenin wrote:
The development of capitalism has arrived at a stage when, although com-
modity production still reigns and continues to be regarded as the basis of
economic life, it has in reality been undermined and the bulk of the profits go
to the 'geniuses' of financial manipulation. At the basis of these manipulations
and swindles lies socialised production, but the immense progress of mankind,
which achieved this socialisation, goes to benefit... the speculators.
This separation of money capital from productive capital and this su-
premacy continued to grow, with the result that today we see a relatively
independent financial superstructure sitting on top of the world economy
and most of its national units. That is to say, there is now an inverted relation
between the financial and the real, where the financial expansion feeds
not on a healthy real economy but on a stagnant one (Paul Sweezy, The
Triumph Of Financial Capital, Monthly Review, June 1994).

Explosion of Credit and Speculation Today

The relative weight of the financial sector in the globalised international
economy thus increased steadily all through, but very disproportionately
since the 1980s, facilitated by neoliberal deregulation and the informa-
tion revolution. Of this, by far the largest and fastest growing component
is made up of speculation and other reckless activities: derivatives trade,
hedge fund activities, sub-prime loans (see glossary in Appendix II) and
so on. According to the Bank of International Settlements, as of December
2007, the total value of derivatives trade stood at a staggering $516 trillion.
This has grown from $100 trillion in 2002. Thus, this shadow economy is
10 times larger than global GDP
($50 trillion) and more than five
times larger than the actual trad-
ing in shares in the worlds stock
exchanges ($100 trillion).
Trade in derivatives and gen-
erally in stock and currencies
involve the self-expansion of
money capital. As Marx had
pointed out, making money out of
17
money without going through troublesome production processes has long
been a cherished ideal of the bourgeoisie and in recent decades that ideal
has been brilliantly put into practice. This is where speculative activities
differ essentially from the role played by finance capital, originally defined
as bank capital, i.e., capital in money form, which is ... actually transformed
into industrial capital and is operated by financial oligarchies (Lenin in
Imperialism, chapter III, Finance Capital and the Financial Oligarchy).
In the present context, speculation is trade in financial instruments with the
goal of making fast bucks; or to be more precise, buying and selling of risks.
Commercial banks, investment banks and insurance companies deal in both
industrial financing and speculation in real life the two categories are thus
lumped together but in terms of specific economic role performed they are
very different. Traditional credit and production-oriented finance capital serves
the real economy agriculture, industries, services, where wealth is produced
and people get jobs whereas speculative capital produces no real wealth.
As we have seen, top bankers in the mid-19th century cautioned about
extensive fictitious credits and Marx talked of "over-speculation". John
Maynard Keynes in the mid-1930s warned, Speculators may do no harm
as bubbles on a steady stream of enterprise. But the position is serious
when enterprise becomes the bubble on a whirlpool of speculation. When
the capital development of a country becomes a by-product of the activities
of a casino, the job is likely to be ill-done. (The General Theory of Employ-
ment, Income and Money).
Despite the warnings, and whatever the social costs, speculation has been
highly rewarded by the state and other institutions of the capitalist class.
Because decaying capitalism or imperialism discovered in it one of the most
if not the most lucrative escape routes from the crisis of overproduction/
over-accumulation that resurfaced since 1970s. In 1997 the Nobel Memorial
Prize in Economic Science was awarded to Americas Robert Merton and
Myron Scholes, who had just developed a model for pricing derivatives such
as stock options. This model or technique was expected to help speculate
scientifically and reap mega profits safely. It was a different story though,
that the Long Term Capital Management a hedge fund where Merton and
Scholes were partners and which worked according to the prized technique
found itself on the verge of collapse within a year the prize was awarded,
and was rescued by the New York Federal reserve.
Acting in the same spirit, financial authorities in the US ignored grave
warnings from eminent economists and persistently declined to impose any
regulation on hedge funds. Thus Alan Greenspan said in 2004:
"Not only have individual financial institutions become less vulnerable to
shocks from underlying risk factors, but also the financial system as a whole
18
has become more resilient."
But as Warren E. Buffett observed five years ago, derivatives are financial
weapons of mass destruction, carrying dangers that, while now latent, are
potentially lethal. Mass destruction indeed, as we now find, both in terms of
capital values destroyed and the number of people financially ruined or af-
fected across the world! As Martin Wolf of the Financial Times aptly observed,
The US itself looks almost like a giant hedge fund. The profits of financial
companies jumped from below 5 per cent of total corporate profits, after tax,
in 1982 to 41 per cent in 2007.
In addition to bourgeois scholars including acting and former chief econo-
mists of IMF, some organic intellectuals of the financial oligarchy have also
been warning about the debacle for quite some time past. Prominent among
them is George Soros. I have cried wolf three times he says (in a promo
of his latest book The New Paradigm for Financial Markets: The Credit Crisis
of 2008 and What It Means) and we must say he really did first with The
Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998,
and now [in his new book]. Only now did the wolf arrive.
He explains why he is so worried:
[The] current crisis differs from the various financial crises that pre-
ceded it. the explosion of the US housing bubble acted as the detonator
for a much larger super-bubble that has been developing since the 1980s.
The underlying trend in the super-bubble has been the ever-increasing use
of credit and leverage. Credit whether extended to consumers or specula-
tors or banks has been growing at a much faster rate than the GDP ever
since the end of World War II. But the rate of growth accelerated and took
on the characteristics of a bubble when it was reinforced by a misconception
that became dominant in 1980 when Ronald Reagan became president and
Margaret Thatcher was prime minister in the United Kingdom.
The relative safety and stability of the United States, compared to the
countries at the periphery, allowed the United States to suck up the savings
of the rest of the world and run a current account deficit that reached nearly 7
percent of GNP at its peak in the first quarter of 2006. This inevitably led
to the crash, he notes. (The Crisis and What to Do About It, The New York
Review of Books, December 4, 2008)
So the ace speculator castigates excessive deregulation and dependence
on debts and deficits, correctly pointing his finger at what we had identified (see
Liberation, December 2003, Mighty Achilles and His Vulnerable Heel) as the
soft underbelly of US imperialism. However, he describes the surface froth all
right, but fails to relate it to the underlying crosscurrents that work it up.
If we are to do that, we must turn to the author of Capital.

19
 Beneath the Surface Froth:
Marx on Crisis
Before we proceed, however, we should recall that Karl Marx had to
take leave of the international proletariat before he could systematically
work up a comprehensive theory of capitalist crisis. Capital Volumes II and
III, Theories of Surplus Value and Grundrisse were not made ready for
publication in his lifetime; nor could he take up his plans for investigating
various other facets of capitalist economy and polity. Naturally there is a
wide array of differing interpretations of Marxs theory, with Luxembourg
for example differing with Lenin, and Ernest Mandel arguing against Paul
Sweezy and others. Available space does not permit us to review the rich
and continuing debate among these schools; we can only present here in
barest outline what we believe to be the basic Marxian approach towards
understanding capitalist crises.

The Ultimate Reason

Take a look at the quotation from the Communist Manifesto with which this
pamphlet begins. Marx and Engels talk of an epidemic of overproduction.
This is overproduction of commodities relative to effective demand: more is
produced than can be sold. Thanks to inadequate purchasing power of the
masses, a big chunk of commodities remain unsalable and drag their owners
(producers/traders) down to ruin. This characteristic feature of capitalism led
Marx to remark, The ultimate reason for all real crises always remains the
poverty and restricted consumption of the masses as opposed to the drive
of capitalist production to develop the productive forces as though only the
absolute consuming power [as distinct from purchasing power A Sen] of
society constituted their limit. (Capital Volume III p. 484)
The problem thus appears simply as a realisation crisis and prompts
one to ask: why on earth do practical men of business commit the folly of
producing more than they can sell?
Going deeper, we find that crises occur not because capitalists are
fools, nor do they fall from the blue. They are produced in course of trade/
business cycles resulting from a complex interplay of several partially in-
dependent variables, the most important being movements in the average
rate of profit. As Marx showed in Part Three of Volume III of Capital, over a
period of time and in the economy as a whole, this rate tends to fall. Here
is how, in brief.
20
The Tendential Fall in the Average Rate of Profit
We all know that capitalists are prone to use more and better machinery
to boost production and save on labour costs. In Marxist economic theory
this is known as increasing the ratio of constant capital (plant and machinery,
raw materials, various fixed assets, etc) to variable capital (capital expended
on purchasing labour power variable because this part, unlike the con-
stant part, grows beyond its own value, i.e., creates surplus value in the
process of production) a ratio which is called the organic composition of
capital. Since live labour is the source of surplus value or profit, replacing
labour by machinery means a proportionate decrease in the rate of profit
for every unit of total (constant plus variable) capital employed. Suppose
a capital worth Rs. 100 crore comprised Rs. 60 crore in constant and Rs.
40 crore in variable capital and the rate of surplus value was 50%. The
amount of surplus value was therefore Rs. 20 crore (50% of Rs. 40 crore
expended on variable capital) and the rate of profit (calculated on total capital
of Rs. 100 crore) was 20%. After say 10 years, the organic composition is
increased constant capital is raised to Rs. 80 crore and variable capital
slashed to Rs. 20 crore. The rate of surplus value remaining the same, the
amount of surplus value would be Rs. 10 crore (50% of Rs. 20 crore) and
the rate of profit 10%.
The illustration is deliberately simplified, but the fact remains that in-
crease in the organic composition of capital and a downward tendency of
the average rate of profit, conditioned by the former, are the general laws
of development of the capitalist mode of production. However, reduced
rate of profit can go hand in hand with increased mass of profit if the total
magnitude of capital on which profit is earned is sufficiently increased. And
that is what usually happens in real life. As Marx puts it,
the same development of the social productiveness of labour1 ex-
presses itself on the one hand in a tendency of the rate of profit to fall
progressively and, on the other, in a progressive growth of the absolute
mass of the appropriated surplus-value, or profit; so that on the whole a
relative decrease of variable capital and profit is accompanied by an absolute
increase of both. This two-fold effect can express itself only in a growth
of the total capital at a pace more rapid than that at which the rate of profit
falls. [Capital, Volume III, p 223]
This has another consequence that has acquired much practical-political

1
Increased organic composition of capital entails higher productivity of labour insofar as the same
number of workers in the same time period convert an ever-increasing quantity of raw and auxiliary
materials into products thanks to the growing application of machinery and fixed capital in general."
(ibid, p 212) It should be noted that this also means greater intensity of exploitation, i.e., increased
rate of surplus value.
21
importance in the current context
of development debate:
as the capitalist mode of
production develops, an ever
larger quantity of capital is re-
quired to employ the same, let
alone an increased, amount of
labour-power. Thus, on a capi-
talist foundation, the increasing
productiveness of labour nec-
essarily and permanently cre-
ates a seeming over-population
of labouring people. If the
variable capital forms just 1/6
of the total capital instead of the
former 1/2, the total capital must be
trebled to employ the same amount of labour-power. And if twice as much
labour-power is to be employed, the total capital must increase six-fold.
[ibid, emphasis added]
We thus see that the tendential law of falling rate of average profit does
not operate in a simple, linear fashion. It is realised only in course of cyclical
movements of capital, through breakdowns and restorations of equilibriums.
It has its own internal contradictions and unleashes a slew of countervail-
ing forces or counteracting influences, such as more intense exploitation
of labour, depression of wages below value, cheapening of the elements of
constant capital, relative over-population (the reserve army of unemployed),
foreign trade (skewed terms of trade and imperialist super profits), expansion
of share capital and to this list prepared by Marx we must add more modern
techniques like monopoly pricing. We should therefore view the law rather
as a tendency, i.e., as a law whose absolute action is checked, retarded and
weakened by counteracting circumstances (ibid, pp 234-35).

Other Causes and Contradictory Tendencies

Our stress on the tendency of the average rate of profit to fall which Marx
regarded as in every respect the most important law of modern economy
and the most essential for understanding the most difficult relations (Grun-
drisse, p 748) should not lead one towards a monocausal understanding
of economic crises and business cycles. Crucial other causes are also
there, such as anarchy of the capitalist mode of production which, inter
alia, periodically upsets the conditions of equilibrium between the two main
sectors one producing consumer goods and the other producing capital
22
goods of capitalist economy. Marx also discussed several auxiliary factors
which influence the specific courses and peculiar features of particular crises.
More important among them are: movements in wage levels, competition
among capitalist concerns, fluctuations in raw material prices, expectations
(or confidence, to use a more modern term), movements in interest rates
and financial turmoil, trends in international trade, and so on. A composite
study of all these, and of other factors discovered in post-Marxian experi-
ence and research, is needed for seeking out the truth from the mountains
of facts and data that are easily available; what we are attempting here is
only an initiation.
The exposition of the internal contradictions of the law takes Marx to
a discussion of certain contradictory tendencies and phenomena which
counteract each other simultaneously. He mentions a number of such
contradictory features such as falling rate of profit alongside the growing
mass of capital, enhanced productivity alongside higher composition of
capital and declares,
These different influences may at one time operate predominantly side
by side in space, and at another succeed each other in time. From time to
time the conflict of antagonistic agencies finds vent in crises. The crises
are always but momentary and forcible solutions of the existing con-
tradictions. They are violent eruptions which for a time restore the
disturbed equilibrium. (ibid, p 249, emphasis added)
Here we have the most concise description of the essential role of crises
as an inbuilt mechanism of capitalism that, up to a point, prepares the way
for a new upturn, just as a forest fire can prepare the woodland for a new
period of growth. To explain how, Marx makes another move ahead in his
exposition.

Over-accumulation and
Depreciation/Destruction of Capital
Where bourgeois economists see the surface phenomenon of commodity
glut during depression, Marx lays bare the deeper substance of overproduc-
tion/over-accumulation of capital and shows how this comes about:
A drop in the rate of profit is attended by a rise in the minimum capital
required by an individual capitalist for the productive employment of labour
Concentration increases simultaneously, because beyond certain limits a
large capital with a small rate of profit accumulates faster than a small capital
with a large rate of profit. At a certain high point this increasing concentration
in its turn causes a new fall in the rate of profit. The mass of small dispersed
capitals is thereby driven along the adventurous road of speculation, credit
frauds, stock swindles, and crises. The so-called plethora of capital always
23
applies essentially to a plethora of the capital for which the fall in the
rate of profit is not compensated through the mass of profit this is
always true of newly developing fresh offshoots of capital or to a
plethora which places capitals incapable of action on their own at the
disposal of the managers of large enterprises in the form of credit.
This plethora of capital arises from the same causes as those which
call forth relative over-population, and is, therefore, a phenomenon
supplementing the latter, although they stand at opposite poles
unemployed capital at one pole, and unemployed worker population
at the other.
Over-production of capital, not of individual commodities although
over-production of capital always includes over-production of commodi-
ties is therefore simply over-accumulation of capital.(ibid, p 250-51;
emphasis added)
Such a situation naturally leads to an unseemly scramble among capi-
talists:
So long as things go well, competition effects an operating fraternity of
the capitalist class so that each shares in the common loot in proportion
to the size of his respective investment. But as soon as it no longer is a
question of sharing profits, but of sharing losses, everyone tries to reduce
his own share to a minimum and to shove it off upon another. The class, as
such, must inevitably lose. How much the individual capitalist must bear of
the loss, i.e., to what extent he must share in it at all, is decided by strength
and cunning, and competition then becomes a fight among hostile broth-
ers. The antagonism between each individual capitalists interests and
those of the capitalist class as a whole, then comes to the surface
(ibid, p 253; emphasis added)
In the age of imperialism this is replicated on an international scale, with
nation states engaged in fierce battles over who is to bear the brunt of
the huge losses. Costs of crises are spread differentially according to the
economic (including financial), political and military prowess of rival states.
Imperialist war being the fastest method of this destruction appears on
the horizon as a real or potential solution to capitalist crisis.
In whatever manner and through however fierce a struggle the losses
may be distributed among individual concerns (and among different states
or trade-and-currency blocs on the international plane), the overriding need
for returning the system to some kind of equilibrium has to be fulfilled. And
that is fulfilled through destruction of part of capital values:
the equilibrium would be restored under all circumstances through the
withdrawal or even the destruction of more or less capital. This would extend
partly to the material substance of capital, i.e., a part of the means of produc-
24
tion, of fixed and circulating capital, would not operate, not act as capital The
main damage, and that of the most acute nature, would occur in respect to
the values of capitals. That portion of the value of a capital which exists only in
the form of claims on prospective shares of surplus-value, i.e., profit, in fact in
the form of promissory notes is immediately depreciated by the reduction
of the receipts on which it is calculated. Part of the commodities on the
market can complete their process of circulation and reproduction only through
an immense contraction of their prices, hence through a depreciation of the
capital which they represent. The elements of fixed capital are depreciated
to a greater or lesser degree in just the same way. definite, presupposed,
price relations govern the process of reproduction, so that the latter is halted
and thrown into confusion by a general drop in prices. This confusion and
stagnation paralyses the function of money as a medium of payment, whose
development is geared to the development of capital and is based on those
presupposed price relations. The chain of payment obligations due at specific
dates is broken in a hundred places. The confusion is augmented by the at-
tendant collapse of the credit system, which develops simultaneously with
capital, and leads to violent and acute crises, to sudden and forcible deprecia-
tions, to the actual stagnation and disruption of the process of reproduction,
and thus to a real falling off in reproduction. (ibid, pp 253-54)
But all this does not, by itself, mean the end of the world. Once the neces-
sary devaluation has been accomplished and over-accumulation eliminated,
normal accumulation can go on:
the cycle would run its course anew. Part of the capital, depreciated
by its functional stagnation, would recover its old value. For the rest, the
same vicious circle would be described once more under expanded condi-
tions of production, with an expanded market and increased productive
forces. (ibid, p 255)
But what is normal need not be permanent. Expanded capitalist reproduc-
tion is intensified reproduction of all its contradictions and within the recurring
cycles reside the seeds of violent destruction of the system:
The highest development of productive power together with the greatest
expansion of existing wealth will coincide with depreciation [devaluation] of
capital, degradation of the labourer, and a most strained exhaustion of his
vital powers. These contradictions lead to explosions, cataclysms, cri-
ses, in which by momentous suspension of labour and annihilation of
a great portion of the capital, the latter is violently reduced to the point
where it can go on.... Yet these regularly recurring catastrophes lead to
their repetition on a higher scale, and finally to its violent overthrow
(Grundrisse, p 750, emphasis added).
25
Credit and Crisis
As noted earlier, credit plays a dual role in the process of production
and circulation. Drawing attention to a basic contradiction of capitalist ac-
cumulation, Marx observed: The credit system appears as the main lever
of over-production and over-speculation in commerce solely because the
reproduction process, which is elastic by nature, is here forced to its ex-
treme limits, and is so forced because a large part of the social capital is
employed by people who do not own it and who consequently tackle things
quite differently than the owner, who anxiously ways weighs the limitations
of his private capital in so far as he handles it himself.
A very realistic explanation of why the financial institutions behave so
irresponsibly with their customers money, isnt it? Marx goes on:
This simply demonstrates the fact that the self-expansion of capital
based on the contradictory nature of capitalist production limits an actual
free development only up to a certain point, so that in fact it constitutes an
immanent fetter and barrier to production, which are continually broken
through by the credit system. Hence, the credit system accelerates the
material development of the productive forces and the establishment
of the world-market. At the same time credit accelerates the violent
eruptions of this contradiction crises and thereby the elements
of disintegration of the old mode of production. (ibid, p 441, emphasis
added)

26
 Overaccumulation and the
Current Crisis
Do the theoretical expositions in Capital tally with the actual working of
capitalism today?
Behind the familiar crisis symptoms we learned in our brief dialogue
with Marx lurks a complex interplay of myriad forces, the most important
being the tendency of the average rate of profit to fall with rising organic
composition of capital and increasingly skewed distribution of income and
wealth. There is no dearth of data supporting this: data showing, for example,
falling profit rates and stagnant/declining wage levels vis--vis corporate
profit explosion in recent decades.
Marx also shows that capitals frantic endeavour to overcome inherent
constraints like mass poverty and inadequate demand leads to artificial
credit-induced expansion. But this false prosperity built on debt always
bounces back in the shape of sudden contraction or crisis, much like a rubber
band getting stretched and snapping back. This phenomenon, witnessed
much more vividly today than in Marxs time, is called a bubble something
that is empty and without substance; a hollow growth that is transient by
definition. Bubbles in other words result from efforts to grow the economy
by means of debt, faster than is warranted by the underlying flow of new
values generated in production and get deflated sooner rather than later.
Such was basically what happened in the roaring twenties that ended
with the Wall Street crash of October 1929. But the more sophisticated and
widespread the credit market, the greater is the degree to which forced
expansion (as Marx called it) can be induced and the more devastating
must be the inevitable crash whenever it comes. This is precisely what we
see today.

Why Bubbles Burst: US Experience

As a strategy to counter the economic slump that started in 1970s, the
working people of America were encouraged or goaded, if you will to
keep up their consumption levels with easy credit made available through
aggressive credit card promotions, new and reckless mortgage practices,
and other means. This policy had a great political benefit too: the enslave-
ment and immobilisation of the proletariat in credit chains. In fact a good
many workers in the US find themselves practically incapable of going on
strike because they are just one check away from homelessness, which
27
means that if they do not get wages even for a month, they stand the risk
of mortgage foreclosure, i.e., losing their mortgaged homes.
As Lenin showed in Imperialism and the Split in Socialism long ago the
imperialist bourgeoisie had devised the tactic of creating a stratum of work-
ers aristocracy in their countries by bribing the latter with small fragments of
super profits earned in colonies, i.e., by paying them relatively better wages.
Today they have improved the tactic further. They now give out huge loans
while restricting wages, imposing on the workers a modern version of debt
bondage and, with that, the ideological enslavement of consumerism. The
American way of life ensures high demand for all sorts of consumables
and the US economy keeps running with astronomical current account and
fiscal deficits with borrowed money, that is.
The collapse into recession was thus delayed no doubt, but at the same
time and in the same measure the latter was made more inevitable and
more intense. As of November 19, 2008, the total U.S. federal debt was
$10.6 trillion, about $37,316 per capita. The catastrophe had to strike, and
did strike. A premonition was felt when the dot-com or New Economy
stock market bubble burst in 2000. The US economy went into recession
and it was weakened further by the 9/11 attacks. In order to allay the fears
of financial collapse, the Federal Reserve lowered short-term interest rates.
But employment kept falling through the middle of 2003, so the Fed kept
lowering short-term lending rates. For three full years, starting in October
of 2002, the real (i.e., inflation-adjusted) federal funds rate was actually
28
negative. This allowed banks to borrow funds from other banks, lend them
out, and then pay back less than they had borrowed once inflation was
taken into account.
This cheap money, easy credit strategy created a new bubble this
time based in home mortgages. This great bubble transfer involved a fur-
ther expansion of consumer debt and an enormous profit explosion in the
finance sector achieved through extension of mortgage financing to riskier
and riskier customers. There were lots of what insiders call ninja loans
no income, no job, no assets.
Monthly Review editor J. B. Foster gives us a penetrating analysis of the
whole process:
the theory [was that] new risk management techniques had devised
the means (hailed bizarrely by some as the equivalent of the great
technological advances in the real economy) with which to separate the
weaker from the stronger debts within the new securities. These new debt
securities were then insured against default by such means as credit-debt
swaps, supposedly reducing risk still further.
But this proved illusory. The payments on sub-prime debt faltered, slowly
at first, then in a massive way. The other side of the problem was that, as a
result of the completely opaque securitization process, no one knew which
debts were bad and which were good. Credit markets froze because the
banks and other financial institutions were ceasing to lend since the bor-
rowers could not be counted on to pay them back.
Under these circumstances, no matter how many hundreds of billions of
dollars in liquidity were poured into the financial sector, nothing happened. All
those with money, including the banks, were hoarding. The U.S. was printing
dollars like mad and flooding the financial sector with liquidity, but rather
than loaning out money capital the banks were stuffing it in their vaults, or
more precisely using it to purchase Treasury bills, creating a kind of revolving
door that negated the attempts of the government. For the time being a
complete meltdown was prevented by injecting capital directly into banks
in return for preferred stock (a partial nationalization of banks), guaranteeing
new debt of banks, and increasing deposit insurance.2 [Monthly Review
October 10, 2008] But thanks to a secular collapse of confidence, money
markets remained tight and recession continued to deepen.

A Dialectical Approach to Crisis

Thirdly, Marx and Engels taught us to understand crises from the stand-
point of historical materialism and revolutionary dialectics. On the one hand,
2
This means insuring a larger proportion of peoples deposits with banks against payment defaults,
so that members of public can feel confident to keep their money in banks.
29
crises are not only not avoidable, they are essential to the law of motion of
capital. They constitute capitalisms inbuilt mechanism for spontaneously
and ruthlessly eliminating excess or over-accumulated capital, so that the
cycle would run its course anew. On the other hand, they achieve this in
a manner that paves the way for more extensive and more destructive
crises, and diminishes the means whereby crises are prevented (Com-
munist Manifesto) and leads finally to the violent overthrow of the rule of
capital (Grundrisse).
However, the exact trajectory of this progression depends on the peculiar
features and severity of a particular crisis as well as other attending factors,
both economic and political. The fierce fight among capitals (big corpora-
tions) and national blocks of capital (nation states) that a crisis engenders
may, for example, lead to local or global wars. Thus the GD was overcome
in the normal course by the mid-1930s only in part; for the rest, it produced
fascism and led to or should we say merged into the Second World War.
What will happen this time round nobody can tell at this point in time, but
certainly we can indicate some special features, broad trends and possible
scenarios.

30
 Long Term Implications and
Proletarian Response
The most important message from the unprecedented financial catas-
trophe and its aftermath is that global capitalisms strategic response to the
crisis of 1970s has failed. That was a three-pronged strategy comprising
deregulation/neoliberalism or market fundamentalism, globalisation and
financialisation. Since these have been the three pillars on which post-1970s
capitalism stood and, in a certain sense, and in certain parts of the world,
flourished the extensive damage they have suffered have left the whole
imposing edifice tottering.

Survival Strategies at Stake

After a so-called golden age of capitalism (roughly a quarter century
after World War II), the crisis of overproduction struck back with a venge-
ance. Old remedies like relying on the military-industrial complex and the
war economy were proving to be inadequate or counter-productive. As a
study released by the Centre for Economic and Policy Research, Wash-
ington, in May 2007 showed, after an initial demand stimulus, the effect of
increased military spending turns negative by about the sixth year. With the
US economy burdened with growing defence spending for decades on
end, by 1990 the value of the weapons, equipment, and factories devoted
to the Department of Defence was 83% of the value of all plants and the
equipment in American manufacturing. A clear case of military industries
crowding out civilian industries, this led to severe economic weaknesses.
There was no question of abandoning military Keynesianism, of course. The
highly powerful military-industrial complex would not have allowed that. But
other means had to be sought out.
Capitalisms first major response at this juncture was Thatcherism of late
1970s and Reaganomics of early 1980s, which was soon exported to the
underdeveloped countries as Structural Adjustment Programme. Essentially
this was a programme of neoliberal restructuring aimed at reinvigorating capi-
tal accumulation. Its two major planks were (a) removing state regulations on
the growth and flow of capital and wealth, and (b) radically reducing taxes
with a view to redistributing income from the poor and middle classes, so
that the rich can invest and reignite economic growth. But reduced incomes
of the poor and middle classes dampened demands, while not necessarily
31
inducing the rich to invest more in production. Rather, what the rich did was
to channel a large part of their enhanced wealth to speculation.
The second major response was globalisation, which basically meant
breaking down of state barriers resulting in more rapid and closer consolida-
tion of the global capitalist economy, with China and Soviet bloc countries
now fully integrated into it. A major component of this was international
relocation of production and business process outsourcing (BPO). By the
middle of the first decade of the 21st century, roughly 40-50 per cent of the
profits of US corporations began to be derived from their operations and
sales abroad, especially in China. But globalization actually exacerbated the
problem of overproduction by adding to productive capacity. For example,
in the wake of dot-com bubble in 2000, the New York Times reported on
one of the many excesses of the period:
In the last two years, 100 million miles of optical fibre more than enough
to reach the sun were laid around the world as companies spent $35 bil-
lion to build Internet-inspired communications networks. But after a string
of corporate bankruptcies, fears are spreading that it will be many years
before these grandiose systems are ever fully used.
Numerous other hiccups in the working of globalisation even from the
viewpoint of the bourgeoisie have been widely discussed. As for finan-
cialisation, it moved from one bubble-bust cycle to another before meeting
the recent crippling setback.
Not that these three sets of responses came one after the other in a
planned manner. They emerged as interconnected, inter-aided pragmatic
measures and gradually dovetailed into one another in such a way that now it
appears as one indivisible whole. This is why the body blow to financialisation
has seriously undermined the credibility of neoliberalism and globalisation
also. The notion that the market behaves itself and corrects itself without
government intervention has crumbled and contagion the spread of the
crisis across the globe more quickly and devastatingly than ever has
become the most visible and dreaded face of globalisation.

Confluence of Many Crises

The financial crisis and depression economics have appeared as sort
of add-ons to the already raging food, energy and environment crises.
We have long been witness to a process of financial capital systematically
destroying and usurping third world agriculture under the aegis of the WTO
and IMF. And now with rising joblessness and further reduction in public
outlays in agriculture in countries like India, food availability for some 90%
of world population will decline further, adding to what Lenin once called
inflammable material in world politics.
32
 The recent drop in petroleum prices is not an unmixed blessing either. For
one, it reduces income and consumption in petroleum-exporting countries.
Moreover, if the present price level points to the unsavoury role of speculative
trading during the earlier period of rising prices, it also constitutes probably
the most telling confirmation of falling demand with falling industrial and
commercial activities.
Again, financial difficulties will prompt corporations and nations to put on
hold costly climate protection measures. UN Secretary-General Ban Ki-Moon
has warned the world against backsliding in the fight against climate change
as it battles the financial crisis, saying When the world has recovered from
the economic recession, it will not have recovered from climate change.
This mix-up of multiple crises makes the present juncture potentially very
challenging both in economic and political terms to the continued rule of
capital. And of course, the more so because the flag carrier itself, already
old and battered in many battles, is now caught rudderless in a Typhoon
on the high seas.

US in a Phase of Historic Decline

Like the present crisis, the GD also was made in the US. But when
the latter struck, the US was already in the first phase of gaining economic
supremacy in the capitalist world and it was not assailed by any political or
military crisis. In the present case, that country was already in a historical
phase of slow, long-term decline in economic prowess (measured in terms
of share in world GDP, trade and manufactures; savings rate etc) particularly
relative to emerging economies like China. Just consider the fundamentals:
growing fiscal and budget deficits, persistently declining competitiveness of
US industries, unbearable costs of the Iraq war, the weakening dollar, and
so on, to name only the more glaring distortions.
In the 1970s Americans had a savings rate of over 10%. Now it is zero.
In the 1970s America still had a very strong manufacturing sector. Now it
is down to less than 15% of US GDP. In a word, the mind-boggling sums
spent on unproductive areas like militarism and speculation has exacted a
very high opportunity cost- things not done because the money/resources
were spent on something else in terms of neglected infrastructure and
other requirements for the countrys long term economic health.
Most important, US leadership of the capitalist world has long been exer-
cised through Wall Streets status of being the undisputed centre of interna-
tional finance with the dollar as the international currency. The recent blow
has badly weakened that. Of course, no single currency is yet in a position
to completely replace the dollar as international medium of exchange. But a
33
partial shift to the Euro and other hard currencies had already begun since
the early years of this century and, depending on how the crisis plays itself
out, this trend may grow and threaten the rule of King Dollar.
This threat looks all the more serious in the context of the ever-growing
American national debt. As on November 19, 2008, the world's richest
country owed a whopping $10.6 trillion to others. Most other countries keep
a good portion of their reserves in the US dollar, which they in turn invest
in financial securities issued by the US government, considered to be very
safe. Thanks to the high demand, the returns offered on these securities
are low, which in turn ensures that interest rates in the US are also low. The
low interest rate in its turn encourages more and more Americans to bor-
row and buy goods and services that exporting countries have to offer. And
when that happens, countries like China and Japan earn US dollars, which
are again invested in the financial securities issued by the US government.
When one set of financial securities becomes due for repayment, it issues
new financial securities to repay the holders of the old securities. So, money
brought in by the newer investors is used to pay off the older investors. That
is what makes it a Ponzi scheme, officially called deficit financing. The US
government can keep doing this because the major exporters are ready to
keep recycling the dollars they earn through US banks and the US economy
and reinvesting in the US government securities.
But sooner or later a correction to this distortion or maladjustment is una-
voidable. The towering mountain of debt raises the question of Americas
ability to meet its obligations. If the doubt about the stability of the US
economy worsens, the worldwide demand for US dollars would decline,
causing the dollar exchange rate to plummet. American imports would
decline, dampening the surge of consumption and slowing the very growth
engines of exporting countries like China and many others. The whole world
would once again pay dearly for American instability.
This problem is further compounded by ever-growing fiscal deficits. The
latest Congressional Budget Office (CBO) release of the updated Fiscal
Year 2009 budget numbers showed a $1.2 trillion deficit for the fiscal year
(8.5% of GDP). However, a closer examination of the report shows that these
numbers are dramatically underestimated. Some estimates put the deficit
at $2.2 trillion for the fiscal year or nearly 100 per cent higher than is being
reported. In fact, the deficit will finish the fiscal year at an astonishing 15.5
per cent of GDP! Federal spending will rise to 32 percent of GDP.
Moreover, the US has been suffering from a political crisis of legitimacy
and leadership while finding itself burdened with an over-extended military
juggernaut and a Vietnam-like situation in Iraq. No doubt the election of a
very popular president has appeared as a much-needed political bailout
34
package for the American elite, but nobody expects a miracle from Barack
Obama. The present crisis is therefore widely seen as the precursor of a
shift in global power balance a shift towards greater multipolarity marked
particularly by the rise of the East.

Accentuated Power Struggle in a Multipolar

World
While Vladimir Putin has been vocal about this for quite some time
past, with the onset of the crisis even men like Tony Blair, Ban Ki Moon
and Peer Steinbruck have expressed similar views. The US authorities
too have recognised this in an intelligence department forecast.
But that should not be understood in a mechanistic way to mean the
decline of the US alone. Apart from the EU and Japan, Russia and China
too are severely affected. Russian resurgence and the countrys capacity
to challenge the US on many issues depended largely on high prices of
its fuel exports; now with a huge drop in that income it is in for a serious
rouble trouble. Every nation is, and will be, fighting for itself in its own
way and the results cannot be predicted. To take one example, for the
last few years the global economy has been running on two engines, the
U.S. on the consumption side and China on the production side, together

Police handcuffing workers during Republic Windows sit-in in Chicago

35
keeping the entire global economy afloat. Now it will be interesting to
watch how the dovetailed economies of Chimerica as economic his-
torian Niall Ferguson has called it respond to the crisis and which side
scores greater gains at the cost of its contender-partner.
On the occasion of the 30th anniversary of Sino- American trade re-
lations, both countries have expressed the desire for further improving
these relations even as the blame game on economic policies goes on.
Early in January 2009 a couple of stinging commentaries on the official
Xinhua news agency accused US officials of trying to shift guilt for tum-
bling stock markets and collapsing pension funds and house prices away
from their own desks. Developing nations have served as "windshields"
to a US economy battered by the global financial maelstrom, yet it is
blaming them for a problem caused by its own policies, one lead article
commented.
Some early indications of the struggle among world powers to shift the
burden of the crisis on to one another and to the third world were expected
from the mid-November White House summit of heads of G20 nations.
Shortly before the meeting, Nicolas Sarkozy said that it was necessary to
rebuild the entire global financial and monetary system, the way it was
done at Bretton Woods. Times have changed, he added: now the Euro
and other currencies have a place in world financial exchanges, a new
reality that should be reflected in new rules. Many leaders called for new
rules and tougher regulations together with restructuring the IMF. But just
on the eve of the Summit President Bush announced, The crisis is not a
failure of the free-market system, and the answer is not to try to reinvent
that system. It would be a terrible mistake to allow a few months of
crisis to undermine faith in free market capitalism, he observed. In the
event it was the US position that prevailed and attempts at a new Bretton
Woods system were stymied and the voice of Third World muted. But for
a two-paragraph indictment of the United States as the perpetrator of the
financial crisis, the Summit declaration remained vacuous.
However, conflicts among big powers and regional entities are grow-
ing. US hegemony is getting challenged from different quarters. Hailing
the victory of Barack Obama, the European Union said in a unanimously
passed resolution: we want to renew our friendship with the United
States, but this time not as junior partners. In the wake of the financial
crisis European leaders have met separately and the leaders of China,
Japan and South Korea also held a rare joint meeting to work out how
best to cushion Asia from the global recession.
Like inter-imperialist contradictions, those between rich and poor na-
tions are getting intensified. If in certain cases (as in the G20 negotiations)
36
these contradictions are found lumped together, in Latin America the
antagonism between imperialism and the third world remains very much
focused. The recent expulsion of Israeli Ambassador from Venezuela
comes as a continuation of political confrontation. The six Latin America
and Caribbean countries that subscribe to Bolivarian Alternative for the
Americas (ALBA) Cuba, Venezuela, Bolivia, Nicaragua, Honduras and
Dominica had already founded an ALBA Bank to finance regional so-
cial programs and Venezuela has recently created joint banks with Iran,
Russia and China, the latter with $12 billion in commitments.
Last year, as stock markets crashed and a global credit squeeze
threatened global economies, some of the Latin American governments
pushed ahead with plans for a new financial architecture.
At an international conference of political economists in Caracas on
October 8-10, entitled Responses from the South to the global economic
crisis, Hugo Chavez said the people of the world no longer support
the privatised banking system while Ecuadors economic policy minister
Pedro Paez said society must reclaim the leading role that has been
kidnapped by the centres of political and economic power the capitalist
system is not the only option.
Proposals for a new financial system also emerged from the confer-
ence, which include: (a) states in the region should take immediate
control of their banking systems, without indemnification, according to
the principle of the new Ecuadorian constitution, Article 290.7 of which
states that nationalisation of private debt is prohibited, (b) monetary
coordination should be strengthened to avoid a war of competitive de-
valuations, which would undermine the integration process of Union of
South American Nations (Unasur a South American integration process
begun in 2007 that envisages a new continental currency) and obstruct
a regional response, (c) immediate implementation of Bancosur (The
Bank of the South), which should become the heart of the transforma-
tion of the existing network of banks, (d) establish exchange controls to
protect reserves and prevent capital flight, (e) following the principle of
assisting the people and not the bankers, social programmes must be
maintained, (f) the present juncture should be seen as an opportunity
for the countries in the region to get rid of the IMF and the World Bank,
and to begin creating a new international financial architecture.
The crisis is also leading to the further intensification of the contradic-
tion between the bourgeoisie and the working class and that between
imperialism and socialism on the ideological plane. The world proletariat
thus faces a new set of challenges and opportunities.
37
A Proletarian Response
In theory, the revolutionary proletariat understands the dual roles or func-
tions of periodic crises temporarily, restoring equilibrium through destruc-
tion and ultimately, bringing the end of capitalism nearer.
As for an assessment of the present one, is it only a crisis, however seri-
ous, of neoliberalism and the financial sector as distinct from a systemic
crisis of capitalism as such? Can it therefore be solved by resurrecting
Keynesianism and founding new regulatory institutions say something
like a Bretton Woods II?
The class-conscious proletariat rejects all such patently bourgeois no-
tions that are doing the rounds in the context of the setback to monetarist
and neoliberal theories. A hundred years ago Lenin identified in finance
capital the core and crux of imperialism and this is a hundred times truer
today. The credit system now works like a kind of central nervous system
through which the overall circulation of money capital to and from firms,
sectors, countries and regions is coordinated; a serious damage to this
system certainly imperils the whole organism of capital. But the proletariat
also knows that without adequate subjective preparation of the revolutionary
forces under the leadership of communist party, even the best of objective
situations does not lead to revolution and socialism. So it does not indulge in
speculation about collapse of capitalism. It senses the challenging opportuni-
ties opened up by the crisis and takes up the tasks in hand with redoubled
energy, keeping a close, constant watch on changes in the situation.
Everywhere capitalists are now trying to pass on the burden of the crisis
to the shoulders of the working messes, who are fighting back. The recent
victorious struggle waged by workers of a Chicago-based factory workers
and their families occupied the closed concern and compelled the employers
and the state to concede their just demands is an inspiring case in point.
All sections of the working people as well as the intelligentsia and other
strata are and will be coming out in the struggle to defend their basic
economic and political interests. To unite with, organise and lead them is
the obvious first task of the working class.
But this cannot be done without fighting against the defensive outlook spread
by reformist and reactionary trade unions as well as other organisations in the
name of difficult situation and defensive struggle. Dialectically there is an
element of offence in every defence, and vice versa. The working masses should
be enlightened on the fact that the new onslaughts of capital actually stem from
its weakness, its grave problems, not its strength. A really broad, militant unity of
toilers can generate a heroic resistance, mobilise new allies from non-proletarian
strata and bring the day of ultimate victory nearer to instil this confidence
among the masses is a foremost duty of the most advanced class.
38
 Second, the crisis is universal but the working class
must formulate its fighting slogans in accordance with
conditions in each particular country. As opposed to
the bourgeois states policy of bail out the rich and
boot out the poor, it should uphold policies like impos-
ing punitive fines on financial swindlers so as to pay up
the common people who have lost their money, direct
state initiative in job creation and other measures for
improving peoples purchasing power as the basic
means of mitigating the decision. In other words, the
proletariat should be seen to be fighting not just for its
narrowly conceived economic demands, but for the overall interests of the
nation. In this hour of crisis it should, in the words of Communist Manifesto,
rise to be the leading class of the nation, must constitute itself the nation...
though not in the bourgeois sense of the word.
Third, the working class should vigorously utilise the present situation,
when everybody is discussing the limits of capitalism and irrelevance
of Marxism, to hold high the banner of socialism as the only real and
achievable solution to the burning problems of the day. This campaign
must include a live expos of social democracy as a defender of capital-
ism, while uniting with the mass following of social democratic and other
left-of-the-centre parties.
Global experience in the age of imperialism, which Lenin defined as
moribund monopoly capitalism under the domination of finance capital,
brilliantly confirms and enriches the Marxist-Leninist explanation of busi-
ness cycles and capitalist crisis. Guided by this revolutionary ideology, the
world proletariat must surge forward at the head of the fighting millions in
struggles for immediate relief as well as the ultimate goal of liberating all
humankind from the clutches of capital.

39
 Appendices

Appendix - 1

Timeline of Trouble

2007
FebruaryMarch: Subprime market in trouble with several subprime lenders
declaring bankruptcy, announcing significant losses, or putting themselves
up for sale.
March 6: Ben Bernanke, quoting Alan Greenspan, warns that the Government
Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, were a source
of "systemic risk" and suggest legislation to head off a possible crisis
April 18: Freddie Mac fined $3.8 million by the Federal Election Commis-
sion as a result of illegal campaign contributions, much of it to members of
the United States House Committee on Financial Services which oversees
Freddie Mac.
June 20: Merrill Lynch seized $800 million in assets from two Bear Stearns
hedge funds that were involved in securities backed by subprime loans.
July 19: Dow Jones Industrial Average closes above 14,000 for the first time
in its history.
August 6:American Home Mortgage Investment Corporation (AHMI) files
Chapter 11 bankruptcy.
August 9: French investment bank BNP Paribas suspends three investment
funds that invested in subprime mortgage debt. This would be followed by
many credit-loss and write-down announcements by banks, mortgage lend-
ers and other institutional investors. The European Central Bank pumps 95
billion euros into the European banking market.
August 10: Central banks coordinate efforts to increase liquidity for first
time since the aftermath of the September 11, 2001 terrorist attacks. The
United States Federal Reserve (Fed) injects a combined 43 billion USD, the
European Central Bank (ECB) 156 billion euros (214.6 billion USD), and the
Bank of Japan 1 trillion Yen (8.4 billion USD).
August 14: Sentinel Management Group suspends redemptions for investors and
sells off $312 million worth of assets; three days later Sentinel files for Chapter
11 bankruptcy protection. US and European stock indices continue to fall.
August 16: Countrywide Financial Corporation, the biggest U.S. mortgage
lender, narrowly avoids bankruptcy by taking out an emergency loan of $11
billion from a group of banks.

40
 August 31: President Bush announces a limited bailout of U.S. homeowners
unable to pay the rising costs of their debts. Ameriquest, once the largest
subprime lender in the U.S., goes out of business.
September 17: Former Fed Chairman Alan Greenspan says "we had a bubble
in housing" and warns of "large double digit declines" in home values "larger
than most people expect."
September 30: Affected by the spiraling mortgage and credit crises, Internet
banking pioneer NetBank goes bankrupt and the Swiss bank UBS announces
that it lost US$690 million in the third quarter.
October 10: Hope Now Alliance is created by the US Government and private
industry to help some sub-prime borrowers.
October 1517: A consortium of U.S. banks backed by the U.S. government
announces a "super fund" of $100 billion to purchase mortgage-backed secu-
rities whose mark-to-market value plummeted in the subprime collapse. Both
Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson express
alarm about the dangers posed by the bursting housing bubble.
November 1: Federal Reserve injects $41B into the money supply for banks
to borrow at a low rate.

2008
January 221: January 2008 stock market downturn.
January 24: The National Association of Realtors (NAR) announces that 2007
had the largest drop in existing home sales in 25 years.
March 1June 18: 406 people arrested for mortgage fraud in an FBI sting
across the U.S., including buyers, sellers and others across the wide-ranging
mortgage industry.
March 10: Dow Jones Industrial Average at the lowest level since October
2006, falling more than 20% from its peak just five months earlier.
March 14- 16: Bear Stearns gets Fed funding as shares plummet and then
gets acquired for $2 a share by JPMorgan Chase in a fire sale avoiding
bankruptcy. The deal is backed by Federal Reserve providing up to $30B to
cover possible Bear Stearn losses.
May 6: UBS AG Swiss bank announces plans to cut 5,500 jobs by the mid-
dle of 2009
June 19: Ex-Bear Stearns fund managers arrested by the FBI for their al-
legedly fraudulent role in the subprime mortgage collapse. The managers
purportedly misrepresented the fiscal health of their funds to investors publicly
while privately withdrawing their own money.
July 11: Failure of Indymac Bank, the fourth largest bank failure in United
States history
July 30: President Bush signs into law the Housing and Economic Recovery
Act of 2008 which authorizes the Federal Housing Administration to guar-
antee up to $300 billion in new 30-year fixed rate mortgages for subprime
borrowers under certain conditions.
September 7: Federal takeover of Fannie Mae and Freddie Mac which at
41
 that point owned or guaranteed about half of the U.S.'s $12 trillion mortgage
market, effectively nationalizing them. This causes panic because almost
every home mortgage lender and Wall Street bank relied on them to facilitate
the mortgage market and investors worldwide owned $5.2 trillion of debt
securities backed by them.
September 14: Merrill Lynch sold to Bank of America amidst fears of a liquidity
crisis and Lehman Brothers collapse[138]
September 17: The Fed acquires 80 percent of AIG in exchange for lending
it $85 billion. As NYU economics professor Nouriel Roubini (aka Dr. Doom)
puts it, The U.S. government is now the largest insurance company in the
world.
September 19: Paulson financial rescue plan unveiled after a volatile week
in stock and debt markets.
September 23: Federal Bureau of Investigation reported to be looking into
the possibility of fraud by mortgage financing companies Fannie Mae and
Freddie Mac, Lehman Brothers, and insurer American International Group,
bringing to 26 the number of corporate lenders under investigation.
September 25: Washington Mutual seized by the Federal Deposit Insurance
Corporation, and its banking assets sold to JP MorganChase for $1.9bn.
September 29: Emergency Economic Stabilization Act defeated 228-205
in the United States House of Representatives; Federal Deposit Insurance
Corporation announces that Citigroup Inc. would acquire banking operations
of Wachovia.
September 30: US Treasury changes tax law to allow a bank acquiring another
write off all of the acquired bank's losses for tax purposes.
October 1: The U.S. Senate passes HR1424, their version of the $700 bil-
lion bailout bill.
October 3: President George W. Bush signs it into law the Emergency Eco-
nomic Stabilization Act creating a $700 billion Troubled Assets Relief Program
to purchase failing bank assets. The Act also eases accounting rules.
October 6-10: Worst week for the stock market in 75 years. The Dow Jones
lost 22.1 percent, its worst week on record, down 40.3 percent since reach-
ing a record high of 14,164.53 October 9, 2007. The Standard & Poor's 500
index lost 18.2 percent, its worst week since 1933, down 42.5 percent in
since its own high October 9, 2007.[152]
October 6: Fed promises to provide $900 billion in short-term cash loans
to banks.[153]
October 7: Fed makes emergency move to lend around $1.3 trillion directly
to companies outside the financial sector.
October 7: The Internal Revenue Service (IRS) relaxes rules on US corpora-
tions repatriating money held oversees in an attempt to inject liquidity into
the US financial market. The new ruling allows the companies to receive
loans from their foreign subsidiaries for longer periods and more times a
year without triggering the 35% corporate income tax.
October 8: Central banks in USA (Fed), England, China, Canada, Sweden,
Switzerland and the European Central Bank cut rates in a coordinated effort to
42
 aid world economy. Fed also reduces its emergency lending rate to banks.
October 11: The Dow Jones Industrial Average caps its worst week ever with
its highest volatility day ever recorded in its 112 year history. Over the last
eight trading days, the DJIA has dropped 22% amid worries of worsening
credit crisis and global recession. Paper losses now on US stocks now total
$8.4 trillion from the market highs last year.
October 11: Central bankers and finance ministers from the Group of Seven
meet in Washington but cannot agree on any concrete plan.
October 14: The US announces the injection of $250 billion of public money
out of the $700 billion available from the EESA into the US banking system.
The rescue package includes the US government taking an equity position
in banks that choose to participate in the program in exchange for certain
restrictions such as executive compensation. Nine banks agree to participate
in the program and will receive half of the total funds: 1) Bank of America, 2)
JPMorgan Chase, 3) Wells Fargo, 4) Citigroup, 5) Merrill Lynch, 6) Goldman
Sachs, 7) Morgan Stanley, 8) Bank of New York Mellon and 9) State Street.
October 21: The US Federal Reserve announces it will spend $540 billion to
purchase short-term debt from money market mutual funds.
November 12: Treasury Secretary Paulson abandons plan to buy toxic as-
sets under the $700 billion Troubled Asset Relief Program (TARP) and says
the remaining $410 billion in the fund would be better spent on recapitalizing
financial companies.
November 15: The group of 20 meets in Washington DC.
November 24: The US government agrees to rescue Citigroup after an attack
by investors caused the stock price to plummet 60% over the last week.
November 25: The US Federal Reserve pledges $800 billion more to help
revive the financial system. $600 billion will be used to buy mortgage bonds
issued or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and
the Federal Home Loan Banks.

Appendix - 2

Glossary
Orange County
On December 6 1994, Orange County, a prosperous district in California,
declared bankruptcy after suffering losses of around $1.6 billion from a wrong-way
bet on interest rates in one of its principal investment pools. Robert Citron, the
hitherto widely respected Orange County treasurer who controlled the $7.5 billion
pool, had invested the pools funds in a leveraged portfolio of mainly interest-linked
securities at great risk. This was the largest financial failure of a local government
in US history.
43
Subprime Lending
This involves financial institutions providing credit to borrowers deemed "sub-
prime" i.e., those who have a heightened perceived risk of default, such as those who
have a history of loan delinquency or default, those with paltry incomes or a recorded
bankruptcy, or those with limited debt experience. Subprime lending encompasses a
variety of credit types, including mortgages, auto loans, and credit cards.

Foreclosure
Foreclosure is the legal proceeding in which a mortgagee, or other lienholder,
usually a lender, obtains a court ordered termination of a mortgagor's equitable right
of redemption. Usually a lender obtains a security interest from a borrower who
mortgages or pledges an asset like a house to secure the loan.

Securitization
Securitization is the process of creating a more or less standard investment
instrument by pooling assets to back the instrument. Financial institutions take an
illiquid asset, or group of assets, and through financial engineering, transforming
them into a security.
A typical example of securitization is a mortgage-backed security (MBS). Till re-
cently, some subprime originators (mortgage companies or brokers) used to promote
residential loans with features that could trap low income borrowers into loans with
increasing payment (of interest and part of principal) terms that eventually exceed
borrowers capability to make the payments. Most of these loans were originated for
the purpose of reselling them to other financial institutions.

Derivatives
Derivatives are instruments or securities that are derived from another security,
commodity, market index, or another derivative. In other words, a derivative is an
instrument whose value is based on that of another asset. The base is referred to
as the benchmark. Derivatives are also called "Contingent Claims" because they are
dependent on variables which influence the valuation process. The more common
derivatives include those traded in Foreign Exchange (FOREX) or Currency Forward
Markets, Financial Futures Markets, Commodities Futures Markets and so on. They
can be related to one another in numerous ways. For example, in currencies, there is
a cash or spot forex market, a bank forward market, a currency futures market, options
on actual or cash currencies, options on currency futures, swaps on currencies, instru-
ments on stocks or shares (ADRs), options on swaps (swaptions) and so on.
Derivatives are used for risk management, investing, and speculative purposes.
Important institutional users include banks, brokers, dealers and mutual funds. Broadly
there are two distinct groups of derivative contracts.
Over-the-counter (OTC) derivatives are contracts that are traded (and privately
negotiated) directly between two parties, without going through an exchange or other
intermediary. Products such as swaps (including credit default swaps), forward rate
agreements, and exotic options are almost always traded in this way. The OTC market
is the largest market for derivatives, and is unregulated. Exchange-traded derivatives
(ETD) are products that are traded via specialized derivatives exchanges or other
44
exchanges. A derivatives exchange acts as an intermediary to all related transac-
tions, and takes initial margin from both sides of the contract to act as a guarantee.
Being routed through an exchange, they come under regulation by the board of that
exchange and thus indirectly by the government of the country.
There are many types of derivatives, some of which are described below.

Collateralized Debt Obligations

CDOs are a type of asset-backed security constructed from a portfolio of fixed-
income assets. In other words, a CDO is a security backed by a pool of bonds, loans
and other assets. Since 1987, CDOs have become an important funding vehicle.
They represent different types of debt and credit risk, referred to as 'tranches'
or 'slices' such as senior tranches (rated AAA), mezzanine tranches (AA to BB),
and equity tranches (unrated). Each slice has a different maturity and risk associ-
ated with it. The higher the risk, the more the CDO pays. The various types include
Collateralized loan obligations (CLOs) -- CDOs backed primarily by leveraged bank
loans; Collateralized bond obligations (CBOs) -- CDOs backed primarily by lever-
aged fixed income securities; Collateralized synthetic obligations (CSOs) -- CDOs
backed primarily by credit derivatives and so on.
The issuer of the CDO, typically an investment bank, earns a commission at
the time of issue and earns management fees during the life of the CDO. The abil-
ity to earn substantial fees from originating and securitizing loans, coupled with the
absence of any residual liability, skews the incentives of originators in favour of loan
volume rather than loan quality. This is a structural flaw in the debt-securitization
market that was directly responsible for both the credit bubble of the mid-2000s as
well as the credit crisis, and the concomitant banking crisis of 2008.

Futures and Forwards

A futures contract is a standardized contract, traded on a futures exchange, to
buy or sell a standardized quantity of a specified commodity of standardized quality
(which, in many cases, may be such non-traditional "commodities" as foreign cur-
rencies, commercial or government paper [e.g., bonds], or "baskets" of corporate
equity ["stock indices"] or other financial instruments) at a certain date in the future,
at a price (the futures price) determined on the particular exchange at the time of
the contract. The future date is called the delivery date or final settlement date.
The official price of the futures contract at the end of a day's trading session on the
exchange is called the settlement price for that day of business on the exchange.
Both parties of a "futures contract" must fulfill the contract on the settlement date,
whereas an option (see below) grants the buyer the right, but not the obligation,
to exercise the contract. The seller delivers the underlying asset to the buyer, or, if
it is a cash-settled futures contract, then cash is transferred from the futures trader
who sustained a loss to the one who made a profit.
A futures contract is a standardized contract written by a clearing house that
operates an exchange, while a forward contract is a non-standardized contract
written by the parties themselves.
45
Options
These are contracts that give the owner the right, but not the obligation, to buy
(in the case of a call option) or sell (in the case of a put option) an asset. The price
at which the sale takes place is known as the strike price, and is specified at the
time the parties enter into the option. The option contract also specifies a maturity
date. In the case of a European option, the owner has the right to require the sale
to take place on (but not before) the maturity date; in the case of an American
option, the owner can require the sale to take place at any time up to the maturity
date. If the owner of the contract exercises this right, the counterparty must carry
out the transaction.

Caps and Collars

These are contacts that offer protection to borrowers who borrow long term with
an interest rate that resets periodically, as well as to borrowers who borrow for a short
term at a fixed rate and plan to roll the loan each time it matures.
By purchasing a cap, a borrower can limit or cap his maximum interest cost
regardless of how high the rate on his loan or bond gets. When the loan or bond rate
exceeds the cap limit (usually referred to as the strike level) the borrower pays the
higher interest rate but the seller of the cap compensates him for the exact amount
of interest paid in excess of the strike price. The cost of the cap varies based on its
term and the strike level chosen by the borrower.
Similar to a cap, a collar allows a floating-rate issuer/borrower to limit his maxi-
mum interest cost regardless of the rate on his bond or loan. However, to reduce the
cost of the protection, the collar includes an interest rate floor that limits his maximum
interest cost regardless of how low the bond or loan rate becomes. Therefore, a collar
has two strike levels, an upper (cap) strike and a lower (floor) strike. For example,
an issuer and seller may agree on a 3% floor and 5% cap. This hedge effectively
guarantees the issuer/borrower interest cost will always be in a collar between 3%
and 5% in this example. If the interest rate for an interest period is 6%, the seller
will pay to the issuer the difference between 5% and 6% or 1%. If the interest rate
drops to 2%, the issuer must pay the seller the difference between the 3% floor and
actual 2% rate or 1%.

Credit Default Swaps

These are insurance contracts that purport to protect bondholders against the
possibility of default. While purchasing bonds, an investor can also buy CDS issued
by some financial institution like large commercial banks, investment banks or insur-
ance companies to protect himself against the risk of default on the part of the firm
that issued the bonds. The premium that the investor pays for the CDS, calculated
at say two per cent of the amount insured, is called the "rate" or "spread. If the firm
that issued the bonds defaults, the financial institution which issued the CDS will pay
the investor the amount insured (principal) plus interest on that amount.
CDS rates remain low when the market thinks the probability of default of firms
issuing bonds are low and go up when the opposite belief prevails in the market.
Thus they serve as a good barometer of faith in the financial markets.
46
Hedging
A strategy designed to reduce investment risk using call options, put options,
futures contracts etc.

Hedge fund
An investment vehicle that somewhat resembles a mutual fund, but with a number
of important differences. Hedge funds employ a number of different strategies that
are not usually found in mutual funds. For example, there are two fees for manag-
ers: fixed and variable. The fixed fee is a percentage of assets under management.
The variable or performance fee is a percentage of the profit of the fund. Another
important difference is that the minimum required investment is usually quite large
and, as a result, minimizes the participation of retail investors.
According to US law if the fund is "off-shore", it can only sell to non-US investors
and does not have to adhere to any SEC (Securities Exchange Commission) regula-
tions. The term "hedge", however, is often misleading. The traditional hedge fund
is actually hedged. For example, a fund employing a long-short strategy would try
to select the best securities for purchase and the worst for short sale. The combina-
tion of longs and shorts provides a natural hedge to market-wide shocks. However,
much more common are funds that are not actually hedged and engage in high-risk
speculative activities. There are funds that are either long-biased or short-biased.
There are also funds of funds which invest in a portfolio of hedge funds.

Appendix - 3

Looking Back
In many ways the current crisis constitutes the second -- and higher -- stage of
the one that appeared with the "dot-com bubble burst". And it is not without reason
that it is being compared to the GD of 1930s. To better understand the present, let
us therefore take a short and a rather long look back.

The Dot-Com Bubble Burst

Also known as "I.T. / New Economy bubble", the "dot-com bubble" was a speculative
bubble covering roughly 19952000, during which stock markets in Western nations saw
their value increase rapidly thanks to growth in the new Internet sector and related fields.
The period was marked by the founding of a group of new Internet-based companies
commonly referred to as dot-coms. They relied on harnessing network effects by oper-
ating at a sustained net loss to build market share or mind share. These companies
expected that they could build enough brand awareness to charge profitable rates for
their services later. The motto "get big fast" reflected this strategy. During the loss period
the companies relied on venture capital and especially initial public offerings of stock to
pay their expenses. The novelty of these stocks, combined with the difficulty of valuing
47
the companies, sent many stocks to dizzying heights and made the initial controllers of
the company wildly rich on paper.
Historically, the dot-com boom can be seen as similar to a number of other
technology-inspired booms of the past including railroads in the 1840s, automobiles
and radio in the 1920s, transistor electronics in the 1950s, and home computers and
biotechnology in the early 1980s.
As evident from these experiences, a bubble occurs when speculators note the
rapid increase in value and decide to buy in anticipation of further rises, rather than be-
cause the shares are undervalued. Many companies thus become grossly overvalued.
When the bubble "bursts," the share prices fall dramatically, and many companies go
out of business.
This was what happened this time too. Several communication companies, bur-
dened with unredeemable debts from their expansion projects, sold their assets for cash
or filed for bankruptcy. WorldCom, the largest of these, was found to have used illegal
accounting practices to overstate its profits by billions of dollars. The company's stock
crashed when these irregularities were revealed, and within days it filed the largest (till
then) corporate bankruptcy in U.S. history. Other examples include NorthPoint Com-
munications, Global Crossing etc.
Altogether the dot-com bubble crash wiped out $5 trillion in market value of new
technology companies from March 2000 to October 2002. Most of the new high-speed
optical fiber infrastructure remained unutilised, and came to be known as dark fiber.
Several companies and their executives were accused or convicted of fraud for
misusing shareholders' money, and the U.S. Securities and Exchange Commission fined
top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading
investors. Various supporting industries, such as advertising and shipping, scaled back
their operations as demand for their services fell. A few large dot-com companies, such
as Amazon.com and eBay, survived the turmoil and are now doing reasonably well. So
did a number of small players who were able to weather the financial markets storm.
After the dot-com bubble burst, instead of channeling finance capital back into
production through institutional reform, US authorities paved the way for another
bubble by reducing interest rates. Regarding people with investable funds, Yale
economist Robert Shiller wrote in 2005, Once stocks fell, real estate became the
primary outlet for the speculative frenzy that the stock market had unleashed. Where
else could plungers apply their newly acquired trading talents? The materialistic
display of the big house also has become a salve to bruised egos of disappointed
stock investors. (Cited by M. Obstfeld in Models of currency crises with self-fulfilling
features; European Economic Review 40 (1996), pp. 1037-47.)

The Great Depression

World War I was followed by a sharp postwar recession and during the 1920s
millions of Americans began to purchase stocks for the first time. Stock prices rose
steadily. Investors eventually realized that a large imbalance existed between stock
prices and the real assets available to back them up, including profits, and decided to
sell. On October 29, 1929, great numbers of people tried to sell their stocks all at once.
Prices tumbled so drastically on the NYSE and other exchanges that the event became
known as the crash of 1929.
This precipitated the Great Depression (GD).The economy raced downhill. Unem-
48
ployment, which affected 3 percent of the labor force in 1929, reached 25 percent in
1933. People with jobs had to accept pay cuts. Demand for durable goodshousing,
cars, appliancesand luxuries declined, and production faltered. By 1932 the gross
national product had been cut by almost one-third. By 1933 over 5,000 banks had failed,
and more than 85,000 businesses had gone under.
In cities, the destitute slept in shanties that sprang up in parks or on the outskirts
of town, wrapped up in Hoover blankets (newspapers) and displaying Hoover flags
(empty pockets). In African American communities, unemployment was disproportion-
ately severe. In Chicago in 1931, 43.5 percent of black men and 58.5 percent of black
women were out of work, compared with 29.7 percent of white men and 19.1 percent
of white women. The depression quickly spread throughout the world. For example,
nearly 40 percent of the German workforce was unemployed by 1932, bringing grist to
Hitlers mills.
The proximate cause of the GD, as Irving Fisher argued, lay in loose credit and
over-indebtedness, which fueled speculation and asset bubbles that inevitably crashed.
In 1929 margin requirements in stock markets were only 10%. In other words, brokerage
firms would loan $9 for every $1 an investor had deposited. When the market fell, brokers
called in these loans, which could not be paid back. Banks began to fail as debtors de-
faulted on debt and depositors attempted to withdraw their deposits en masse, triggering
multiple bank runs. Government guarantees and Federal Reserve banking regulations to
prevent such panics were ineffective or not used. Bank failures led to the loss of billions
of dollars in assets. Outstanding debts became heavier, because prices and incomes fell
by 2050% but the debts remained at the same dollar amount. After the panic of 1929,
and during the first 10 months of 1930, 744 US banks failed. By 1933, depositors had
lost $140 billion in deposits. In all, 9,000 banks failed in the US during the 1930s.
Bank failures snowballed as desperate bankers called in loans but many borrowers
defaulted. With future profits looking poor, capital investment and construction slowed
or completely ceased. In the face of bad loans and worsening future prospects, the
surviving banks became even more conservative in their lending. Banks built up their
capital reserves and made fewer loans, which intensified deflationary pressures.
The liquidation of debt could not keep up with the fall of prices which it caused.
The mass effect of the stampede to liquidate increased the value of each dollar
owed, relative to the value of declining asset holdings. The very effort of individuals
to lessen their burden of debt effectively increased it. Paradoxically, the more the
debtors paid, the more they owed. This self-aggravating process turned the reces-
sion into a great depression. Fisher called this phenomenon debt-deflation, the
specter of which is again looming large on the horizon today, according to many an
economist based in US.
A good many similarities between the GD and the current crisis are quite evident.
Both started in the financial sector and gradually spread to the real sector as credit
dried up. During both crises many financial institutions either defaulted or had to be
bailed out. In both cases the crisis started with the bursting of a bubble. And of course,
both crises started in the US and subsequently spread to other countries.
The differences also are no less notable. Responses of both fiscal and monetary
policies today are much swifter and vigorous. The GD was characterized by beggar
thy neighbor policies. In mid 1930 the US Congress passed the Smoot-Hawley Tariff
Act that raised tariffs on over 20,000 imported goods to record levels. Other countries
retaliated by also imposing restrictions on imports and engaged in competitive devalu-
49
ations of their respective currencies. This led to a serious contraction of international
trade. This time major trading partners have so far largely avoided the temptation to
tread this path, keeping in mind the adverse consequences of such actions during the
1930s. Some economists believe that thanks to these differences, the current crisis
will not assume such alarming proportions as the GD did.
On the other hand, there are a number of differences that adds to the difficulties
of tackling the present crisis. More important among these are the extreme complex-
ity and lack of transparency of financial operations, the enhanced interpenetration
of financial markets across the world, the excessive preponderance of the financial
sector vis-a-vis manufacture, agriculture, manufacturing and commodities trade.
Elected President in 1932, Franklin Delano Roosevelt instituted a program
termed the New Deal, which included several measures aimed at rebuilding the
economy. By the start of Roosevelts second term in 1937, some progress had been
made against the depression; the gross output of goods and services reached their
1929 level. Unemployment was still high, and per capita income was less than in
1929. The economy plunged again in the so-called Roosevelt recession of 1937,
caused by reduced government spending and the new social security taxes. To battle
the recession and to stimulate the economy, Roosevelt initiated a spending program
which served to tone up demand to some extent.
The New Deal never ended the Great Depression, which continued until the
United States entry into World War II revived the economy. As late as 1940, 15 per-
cent of the labor force was unemployed. Nor did the New Deal redistribute wealth
or challenge capitalism. But in the short run, the New Deal averted disaster and
alleviated misery, and its long-term effects were profound in rebuilding the socio-
economic infrastructure.

New York during the Great Depression

50
From memoirs of Marriner S. Eccles

Inequality of Wealth and Income

The author served as Chairman of the Federal Reserve under Franklin D.
Roosevelt from November 1934 to February 1948. Here he details what he believed
caused the Depression.
As mass production has to be accompanied by mass consumption, mass
consumption, in turn, implies a distribution of wealth -- not of existing wealth, but
of wealth as it is currently produced -- to provide men with buying power equal to
the amount of goods and services offered by the nation's economic machinery.
[Emphasis in original.]
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30
drawn into a few hands an increasing portion of currently produced wealth. This served
them as capital accumulations. But by taking purchasing power out of the hands of
mass consumers, the savers denied to themselves the kind of effective demand for
their products that would justify a reinvestment of their capital accumulations in new
plants. In consequence, as in a poker game where the chips were concentrated in
fewer and fewer hands, the other fellows could stay in the game only by borrowing.
When their credit ran out, the game stopped.
That is what happened to us in the twenties. We sustained high levels of employ-
ment in that period with the aid of an exceptional expansion of debt outside of the
banking system. This debt was provided by the large growth of business savings as
well as savings by individuals, particularly in the upper-income groups where taxes
were relatively low.The stimulation to spend by debt-creation of this sort was
short-lived and could not be counted on to sustain high levels of employment for
long periods of time. Had there been a better distribution of the current income from
the national product -- in other words, had there been less savings by business and
the higher-income groups and more income in the lower groups -- we should have
had far greater stability in our economy. Had the six billion dollars, for instance, that
were loaned by corporations and wealthy individuals for stock-market speculation
been distributed to the public as lower prices or higher wages and with less profits
to the corporations and the well-to-do, it would have prevented or greatly moderated
the economic collapse that began at the end of 1929.
The time came when there were no more poker chips to be loaned on credit.
Debtors thereupon were forced to curtail their consumption in an effort to create a
margin that could be applied to the reduction of outstanding debts. This naturally
reduced the demand for goods of all kinds and brought on what seemed to be
overproduction, but was in reality underconsumption when judged in terms of the
real world instead of the money world. This, in turn, brought about a fall in prices
and employment.
Unemployment further decreased the consumption of goods, which further
increased unemployment, thus closing the circle in a continuing decline of prices.
This then, was my reading of what brought on the depression. [from Beckoning
Frontiers (New York, Alfred A. Knopf, 1951)]

51
Crises are endemic to capitalism, but each particular crisis has
its distinctive features and implications. The present one
has its roots in the economic slump of 1970s. To counter
stagnation in the 'real' or productive economy, big capital,
particularly in the US relied on financialisation, generating
one growth bubble after another. But bubbles inevitably
burst, bringing the fundamental economic problems back
to the surface. New and bigger bubbles lead to still greater
financial crises and worsening conditions of production, in
what has now become a vicious cycle.

The book in your hand shows exactly how this happened in

the present case and adds a backgrounder on the dot-com
bubble burst a few years ago and the Great Depression
of 1930s. To help you arrive at your own judgement, a
chronology of major economic events during the last
two years and a glossary of relevant technical terms
have been appended. You can also read how the Federal
Reserve chairman under President Roosevelt -- the real
architect of the New Deal -- analysed the causes of the
Great Depression and what George Soros has to say on
the recent "financial meltdown". And of course, the whole
discussion is constructed on Marx's essential observations
on capitalist crisis. If you really wish to go deep into the
causes and consequences of the unfolding crisis, this is
your book.

Capital in Crisis:
Causes, Implications and Proletarian Response
by Arindam Sen

An IIMS Publication

February 2009
Price: Rs. 10
Published by: IIMS, U-90 Shakarpur, Delhi - 110092
Phone: 91-11-22521067
 Crisis of
Neoliberalism
and
Challenges
before
Popular
Movements

Arindam Sen

A CPI(ML) Publication
 IMF Downgrades
Global Economic Forecast
Once again
According to its latest report, between April and July 2012 the
IMF sharply revised downwards its growth projections for all
categories of countries. For example, it cut the growth prospect
for UK to 0.2 percent (down from 0.8 percent) this year and
to 1.4 percent (down from2.0 percent) in 2013. It shaved the
growth forecast for the crisis-hit euro zone to 0.7 percent
in 2013, while maintaining its projection of a 0.3 percent
contraction this year.

The IMF chopped its forecast for growth in emerging

economies this year and the next: e.g., China 8.0 percent, (down
from 8.2 percent forecast in April) and 8.5 percent next year
(down from 8.8 percent). It also sharply revised down its growth
projections for India to 6.1 percent this year from 6.9 percent,
and chopped its 2013 forecast to 6.5 percent from 7.3 percent.
Currencies like the Brazilian real and Indian rupee have
depreciated by between 15 and 25 percent in less than a quarter,
the IMF noted. In emerging economies, policymakers should
be ready to cope with trade declines and the high volatility of
capital flows, it said.

The IMF trimmed its US forecasts slightly but warned of the

fiscal cliff (the scheduled expiration of Bush-era tax cuts
and the $1.2 trillion in automatic spending reductions which
can knock the still-weak U.S. economy back into recession)
facing the country. And as Jos Vials, the head of the fund's
monetary and capital markets department, pointed out,
Uncertainties about the fiscal outlook in the United States
present a particular latent risk to global financial stability.
Overall, the IMF cut the 2013 forecast for global economic
growth to 3.9 percent from the 4.1 percent it projected in
April (to view this in perspective, in 2010 the world economy
expanded by 5.3 percent).
 Crisis of
Neoliberalism
and
Challenges
before
Popular
Movements

Arindam Sen
Director,
Indian Institute of
Marxist Studies

A CPI(ML) Publication
 Crisis of Neoliberalism
and
Challenges before Popular Movements

Author:
Arindam Sen
Director, IIMS

October 2012

Price:
Rs. 25

Published by:
Prabhat Kumar
for CPI(ML) Central Committee
Charu Bhawan,
U-90 Shakarpur, Delhi 110092
Phone: 91-11-22521067
 Publishers Note
When the catastrophic financial crisis hit the capitalist world
order a few years back and quickly metamorphosed into a great
recession, we brought out a slim pamphlet titled Capital in Crisis:
Causes, Implications and Proletarian Response.
Capitalism has learnt to live with crises and through crises, the
opening sentences read, but some of them are epochal. Such was
the Great Depression of 1930s. Will the one that is currently unfold-
ing prove to be another? We hinted it would and quoted veteran
Nobel laureate Paul Samuelson: This debacle is to capitalism what
the fall of the USSR was to communism. However, mindful of the
experience of the many convulsions like the dot-com bubble burst
of early 2000s which threatened to but ultimately did not develop
into a global systemic crisis, we resisted the temptation to jump to
a very definite conclusion at that early stage.
But today on the strength of evidence of the last four years we
can say: yes, it is an epochal crisis in the sense that the structures
and strategies of capitalist accumulation in the current neoliberal
mode are in crisis, are permanently failing to deliver the way it did
since 1980s. We have therefore named it more specifically as a crisis
of neoliberalism and expanded our analytical horizon accordingly,
starting from Marx and Lenin and drawing substantially on the
works of later Marxists as well as heterodox economists. Whereas
in the previous pamphlet the popular struggles engendered by the
unfolding crisis were briefly highlighted, in the present one we have
also tried to learn how the dynamics of class struggle crucially influ-
enced or overdetermined, if you will the specific course of reform
or restructuring that followed every structural crisis in history. How,
for example, valiant struggles of the American working class in the
upbeat international environment of 1930s forced the New Deal on
the bourgeoisie and how in an opposite political milieu setbacks
in workers struggles paved the way for the neoliberal structural
readjustment following the structural crisis of 1970s. Such review
is important, we thought, for understanding the class dimensions,
political implications and possible outcomes of the current crisis
an understanding without which we the global 99% cannot hope to
seize the crisis (as Samir Amin has put it) for advancement of our
own cause as against that of the 1%.
Global experience in the age of imperialism, which Lenin defined
as moribund monopoly capitalism under the domination of finance
capital, brilliantly confirms and enriches the Marxist-Leninist expla-
nation of business cycles and capitalist crisis. We hope the present
publication, which updates and broadens the discussion started
earlier, will help activists and observers gain deeper insights into
the economic crisis and its political implications.

6
 Contents

Collapse of the Colossus and its Aftermath 9

Proximate Cause: Overstretched Credit System
and Excessive Speculation
Imperialism as Domination of Finance Capital
Credit Explosion and Crisis
Beneath the Surface Froth: Marx on the Roots of Crisis 19
The Ultimate Reason
The Tendential Fall in the Average Rate of Profit
Other Causes and Contradictory Tendencies
Over-accumulation and
Depreciation/Destruction of Capital
Credit and Crisis
Crises in the Age of Imperialism 29
Two Types of Crisis
History of Structural Crises:
An Outline Sketch
From Great Depression to Golden Period
Inequality of Wealth and Income
1970s: Crisis Strikes Again
Neoliberalism and its Critical Features
Crisis of Neoliberalism 39
The Explosive Job Crisis
European Sovereign Debt Crisis
Grand Feast for Cannibals
The Elusive Search for a Solution
The Austerity Onslaught
Crisis and Class Struggle: Lessons of History 49
American Workers Win New Deal
Reagan and Thatcher Kickstart
Neoliberal Offensive
Popular Rebellions in Latin America
Crisis and Class Struggle: Present Trends and Tasks 61
Lessons of the Occupy Movement
Progressives Must Move Beyond Occupy
Workers, Students and Farmers
against Neoliberal Offensive
The Bolivarian Alternative to Neoliberalism
BIG Picture and Basic Message

7
8
 Collapse of the Colossus
And its Aftermath

18 September, 2008. US Treasury Secretary Ben Bernanke put up

a sombre face and told the law-makers that if the government did
not save the (financial) markets then there might not be any financial
markets in the future.
He was speaking the truth. Over 100 mortgage lenders had
gone bankrupt during 2007 and 2008. Concerns that investment
bank Bear Stearns would collapse had resulted in its fire-sale to
JP Morgan Chase in March 2008. The financial crisis hit its peak in
September and October. Several major institutions either failed, or
were acquired under duress, or were taken over by the government.
These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie
Mac, Washington Mutual, Wachovia, Citigroup, and AIG Insurance
establishments deemed too big to fail. So the Emergency Eco-
nomic Stabilisation Act of 2008, which sanctioned a whopping $700
billion for rescuing the fat cats of Wall Street through the Troubled
Asset Relief Program (TARP), was passed. There was tremendous
popular opposition, including that of some 400 economists two
of them Nobel Prize winners. The basic point was that the package
transferred huge amounts of public money into the hands of private
financiers responsible for the catastrophe instead of punishing them,
thus creating a bad precedent, a moral hazard, for the future. The
bankers government paid no heed, naturally.
As the contagion spread at electronic speed to other rich countries
(actually the rot had started earlier: in August 2007 French giant BNP
Paribas had terminated withdrawals from three hedge funds citing
a complete evaporation of liquidity), the latter too launched their
own bailout packages. A total financial meltdown was thus averted
by governments rescuing financial corporations with taxpayers
9
10
money1 and a weak, halting recovery phase did start in about two
years. Yet, as we write these lines, the stubborn crisis of capital has
spread wider and gone deeper into the soil, displaying new features,
throwing up new debates and generating new struggles as we shall
see in the pages that follow.
But how did things come to such a pass?
To put it very simply, titans like Lehman Brothers, AIG Insurance,
Fannie Mae and Freddie Mac (the last two Government Sponsored
Enterprises) failed because at the hour of need they could no lon-
ger raise money from the market to roll over their short-term debt.
During 2004-07, the top five U.S. investment banks unscrupulously
increased their financial leverage reporting over $4.1 trillion in debt
for fiscal year 2007, about 30% of US GDP for 2007 which increased
their vulnerability to a financial shock.
Being over-exposed to the sub-prime mortgage market and rely-
ing too much on derivatives instruments derived from the perfor-
mance of some distant asset (hence the generic name derivatives)
they suffered huge losses and lost the trust of the market. Investors
became reluctant to lend money even to these prestigious financial
institutions. Failing to meet their obligations, essentially they went
bankrupt, though in most cases (Lehman being the most famous
exception) they were rescued by the government.
The sub-prime mortgage market or sub-prime loans refer
primarily to housing loans to those who could hardly afford them
and in which the initial interest rate was sub-prime (very low) but
escalated over the duration of the mortgage, on the assumption that
as the borrower progressed career-wise there would be an increased
capacity to pay instalments. The sub-prime loan instruments were
then diced and sliced (i.e. mixed up with other more viable loans)
and the resultant derivatives were sold on by the original mortgage
institutions to other banks and financial institutions.
Thus emerged a shadow banking system. The new breed of
derivatives generated by dicing and slicing of sub-prime and other
risky loans were expected to distribute the risks among many finan-
cial institutions and thereby minimise the risks shouldered by each.
[1] China too launched an economic stimulus package (as distinct from a bailout
package for greedy bankers) worth nearly $600 billion with the stress squarely placed on
investments in domestic infrastructure.
11
 This strategy allowed financiers to circumvent regulations and
generate easy credit by taking high risk bets and offloading the risks
on to others. When, with the collapse of the housing bubble and an
avalanche of defaults by sub-prime borrowers, the bets began to
go wrong, the pyramid of deals began tumbling down. More than
once during 2007 and 2008 financial authorities in US and other
countries sought to stem the tide by helping the crisis-ridden banks
and, to a lesser extent, also indebted homeowners. But in vain. The
whole process snowballed and led to the September 2008 debacle.
Strange as it may seem now, the high risk strategy involving
excessive sub-prime loans and an endless web of securitisation or
derivatives-creation was not restricted or regulated by any public or
private authorities. Rather, this strategy was praised as a sure way to
prosperity both for the corporations and for the country. Announc-
ing its 2005 Annual Awards one of the securities industrys most
prestigious awards the International Financing Review (IFR) said,
[Lehman Brothers] not only maintained its overall market presence,
but also led the charge into the preferred space by ... developing
new products and tailoring transactions to fit borrowers needs....
Lehman Brothers is the most innovative in the preferred space, just
doing things you wont see elsewhere.
Yes, Lehman became too smart and thats why it met the fate
it did. Since the epicentre of the devastating earthquake and its
aftershocks lay in the financial sector i.e., the credit network, our
investigation into the causes of the crisis should begin from here.

Proximate Cause:
Overstretched Credit System and
Excessive Speculation
At one time the role of credit of dealers in credit or financiers
was basically to grease the wheels of industry and commerce which
turned out real goods, infrastructure and services. But gradually
their role expanded and today we find them in dual roles: both as
accelerators of growth and harbingers of crisis. The US experience
under the neoliberal order illustrates this very well.
As a strategy to counter the economic slump that started in 1970s,
the working people of America were encouraged to keep up their
12
consumption levels with easy credit made available through aggres-
sive credit card promotions, new and reckless mortgage practices,
and other means. This policy had a great political benefit too: the
enslavement and immobilisation of the proletariat in credit chains. As
Lenin showed in the article Imperialism and the Split in Socialism
long ago, the imperialist bourgeoisie had devised the tactic of creating
a stratum of workers aristocracy in their countries by bribing the
latter with small fragments of super profits earned in colonies, i.e., by
paying them relatively better wages. Today they have improved the
tactic further. They now give out huge loans while restricting wages,
imposing on the workers a modern version of debt bondage and, with
that, the ideological enslavement of consumerism2. The American
way of life ensures high demand for all sorts of consumables and
the US economy keeps running with astronomical current account
and fiscal deficits with borrowed money, that is.
When the dot-com or New Economy stock market bubble
burst in 2000, the US economy went into recession. It was weakened
further by the 9/11 attacks. In order to allay the fears of financial
collapse, the Federal Reserve lowered short-term interest rates. But
employment kept falling through the middle of 2003, so the Fed kept
lowering short-term lending rates. For three full years, starting in
October of 2002, the real (i.e., inflation-adjusted) federal funds rate
was actually negative. This allowed banks to borrow funds from
other banks, lend them out, and then pay back less than they had
borrowed once inflation was taken into account.
The cheap money, easy credit strategy created a new bubble
this time based in home mortgages. This great bubble transfer
involved a further expansion of consumer debt and an enormous
profit explosion in the finance sector achieved through extension of
[2] With the onset of the crisis, people from all walks of life are waking up to this
new method of exploitation. As David Graeber pointed out recently, The overwhelming
majority of Occupiers were, in one way or another, refugees of the American debt system.
The rise of OWS allowed us to start seeing the system for what it is: an enormous engine
of debt extraction. Debt is how the rich extract wealth from the rest of us, at home and
abroad.
Occupy was right to resist the temptation to issue concrete demands. But if I were to frame
a demand today, it would be for as broad a cancellation of debt as possible(Can Debt
Spark a Revolution? September 5, 2012, see http://www.thenation.com/article/169759/
can-debt-spark-revolution#).
13
mortgage financing to riskier and riskier customers. The collapse into
recession was thus delayed no doubt, but at the same time and in the
same measure the latter was made more inevitable and more intense.
The following passages from Marx, with a bit of updating as
suggested in square brackets, may help us understand why the
economic catastrophe started as a credit and money crisis:
In a system of production, where the entire continuity of the re-
production process rests upon credit, a crisis must obviously occur a
tremendous rush for means of payment when credit suddenly ceases
and only cash payments have validity. At first glance, therefore, the
whole crisis seems to be merely a credit and money crisis. And in
fact it is only a question of the convertibility of bills of exchange [add
here the modern credit instruments AS] into money. But the majority
of these bills represent actual sales and purchases, whose extension far
beyond the needs of society is, after all, the basis of the whole crisis.
At the same time, an enormous quantity of these bills of exchange
represents plain swindle, which now reaches the light of day and
collapses The entire artificial system of forced expansion of the
reproduction process cannot, of course, be remedied by having
some bank, like the Bank of England, [today we would perhaps say
the US Federal Reserve] give to all the swindlers the deficient cap-
ital by means of its paper and having it buy up all the depreciated
commodities at their old nominal values. Incidentally, everything
here appears distorted, since in this paper world, the real price and
its real basis appear nowhere (ibid, p 490, emphasis added).
Marx also speaks of a new financial aristocracy, a new variety of
parasites in the shape of promoters, speculators and simply nominal
directors; a whole system of swindling and cheating by means of
corporation promotion, stock issuance and stock speculation and
of fictitious capital, interest-bearing paper which is enormously
reduced in times of crisis, and with it the ability of its owners to
borrow money on it on the market. (Capital, Vol. III, p 493). If this
sounds contemporaneous, so would the anxiety expressed by the
British Banks committee a predecessor of various expert com-
mittees and monetary authorities of our day more than 150 years
ago regarding the fact that extensive fictitious credits have been
created by means of discounting and rediscounting bills in the
14
London market upon the credit of the bank alone, without reference
to quality of the bills otherwise. (ibid, p 497, emphasis ours).
Junk securities, then, are no invention of the Wall Street-wallahs
of our time!

Imperialism as Domination of Finance Capital

The role of credit in the capitalist system as a whole went on
expanding and reached a qualitatively new stage with the advent
of modern imperialism, a parasitic and decaying system marked by
new features like all-round monopolisation, export of capital out-
weighing export of commodities, the rise of the financial oligarchy
etc. Money capital now metamorphosed into finance capital and
attained a much more influential position:
Imperialism, or the domination of finance capital, is that highest
stage of capitalism in which the separation [of money capital
from industrial or productive capital] reaches vast proportions. The
supremacy of finance capital over all other forms of capital means
the predominance of the rentier and of the financial oligarchy; it
means that a small number of financially powerful states stand out
among all the rest.
[The] twentieth-century marks the turning point from the
old capitalism to the new, from the domination of capital in gen-
eral to the domination of finance capital. (Lenin in Imperialism;
emphasis added)
Now what is finance capital? Basically it is the coalescence of
bank capital and industrial capital, said Lenin, and today perhaps
we should include commercial capital as well. This coalescence,
however, internalises a good amount of tensions and contradictions
between the different sectors which maintain their special identities
and interests. Modern banks, Lenin showed, concentrated the social
power of money in their hands, and began to operate as a single
collective capitalist, and so subordinate to their will not only all
commercial and industrial operations but even whole governments.
Also important in this context was the three-way personal link-up
between industry, banks and the government.
Elaborating on the new stage, Lenin wrote:
15
 The development of capitalism has arrived at a stage when,
although commodity production still reigns and continues to be
regarded as the basis of economic life, it has in reality been under-
mined and the bulk of the profits go to the geniuses of financial
manipulation. At the basis of these manipulations and swindles lies
socialised production, but the immense progress of mankind, which
achieved this socialisation, goes to benefit... the speculators.
This separation of money capital from productive capital and
the supremacy of the former continued to grow, with the result that
today we see a relatively independent financial superstructure
sitting on top of the world economy and most of its national units.
That is to say, there is now an inverted relation between the financial
and the real, where the financial expansion feeds not on a healthy
real economy but on a stagnant one (Paul Sweezy, The Triumph
Of Financial Capital, Monthly Review, June 1994).

Credit Explosion and Crisis

The relative weight of the financial sector in the international econ-
omy thus increased steadily all through, but very disproportionately
since the 1980s, facilitated by neoliberal deregulation and the infor-
mation revolution. By far the largest and fastest growing component
of this sector is made up of speculation and other reckless activities:
derivatives trade, hedge fund activities, sub-prime loans and so on.
As Martin Wolf of the Financial Times aptly observed, The US itself
looks almost like a giant hedge fund. The profits of financial companies
jumped from below 5 per cent of total corporate profits, after tax, in
1982 to 41 per cent in 2007. According to the Bank of International
Settlements, as of December 2007, the total value of derivatives trade
stood at a staggering $516 trillion, growing from $100 trillion in 2002.
In other words, this shadow economy was 10 times larger than glob-
al GDP ($50 trillion) and more than five times larger than the actual
trading in shares in the worlds stock exchanges ($100 trillion).
Trade in derivatives and generally in stock and currencies involve
the self-expansion of money capital. As Marx had pointed out, making
money out of money without going through troublesome production
processes has long been a cherished ideal of the bourgeoisie. In recent
decades that ideal has been brilliantly put into practice.
16
 In the present context, speculation is trade in financial instruments
with the goal of making fast bucks; or to be more precise, buying and
selling of risks. Commercial banks, investment banks and insurance
companies deal in both industrial financing and speculation in real
life the two categories are thus lumped together but in terms of
specific economic role performed they are different. Traditional credit
and production-oriented finance capital serves the real economy ag-
riculture, industries, services, where wealth is produced and people
get jobs whereas speculative capital produces no real wealth.
As we have seen, top bankers in the mid-19th century cautioned
about extensive fictitious credits and Marx talked of over-spec-
ulation. John Maynard Keynes in the mid-1930s warned, Specu-
lators may do no harm as bubbles on a steady stream of enterprise.
But the position is serious when enterprise becomes the bubble on a
whirlpool of speculation. When the capital development of a country
becomes a by-product of the activities of a casino, the job is likely to
be ill-done. (The General Theory of Employment, Income and Money).
Despite the warnings, and whatever the social costs, speculation
has been highly rewarded by the state and other institutions of the
capitalist class. But why? Because decadent capitalism or imperialism
discovered in it one of the most if not the most lucrative escape
routes from the crisis of overproduction/over-accumulation that
resurfaced since 1970s. The 1997 Nobel Memorial Prize in Econom-
ic Science was awarded to Americas Robert Merton and Myron
Scholes, who had just developed a model for pricing derivatives
such as stock options. This model or technique was expected to help
speculate scientifically and reap mega profits safely. In practice,
however, the results were not exactly encouraging. Long Term
Capital Management a hedge fund where Merton and Scholes
were partners and which worked according to the prized technique
found itself on the verge of collapse within a year the prize was
awarded, and was rescued by the New York Federal Reserve.
Not that there was no saner voices around. Early in the 2000s
billionaire investor Warren E. Buffett had called derivatives finan-
cial weapons of mass destruction and in March 2007 Ben Bernanke,
quoting Alan Greenspan, warned that the GSEs Fannie Mae and Fred-
die Mac were a source of systemic risk and suggested legislation
to head off a possible crisis. Then in late 2008 George Soros wrote:
17
 [The] current crisis differs from the various financial crises
that preceded it. the explosion of the US housing bubble acted as
the detonator for a much larger super-bubble that has been devel-
oping since the 1980s. The underlying trend in the super-bubble has
been the ever-increasing use of credit and leverage. Credit whether
extended to consumers or speculators or banks has been growing
at a much faster rate than the GDP ever since the end of World War
II. But the rate of growth accelerated and took on the characteristics
of a bubble when it was reinforced by a misconception that became
dominant in 1980 when Ronald Reagan became president and Mar-
garet Thatcher was prime minister in the United Kingdom.
The relative safety and stability of the United States, compared to
the countries at the periphery, allowed the United States to suck up the
savings of the rest of the world and run a current account deficit that
reached nearly 7 percent of GNP at its peak in the first quarter of 2006.
This inevitably led to the crash, he pointed out. (The Crisis and What
to Do About It, The New York Review of Books, December 4, 2008).
So the ace speculator castigates excessive deregulation and de-
pendence on debts and deficits.
Well, he describes the surface froth all right, but fails to relate it
to the underlying crosscurrents that work it up. If we are to do that,
we must turn to the author of Capital.

18
 Beneath the Surface Froth
Marx on the Roots of Crisis

Before we proceed, however, we should recall that Karl Marx had

to take leave of the international proletariat before he could work
out a comprehensive theory of capitalist crisis. Capital Volumes II
and III, Theories of Surplus Value and Grundrisse were not made ready
for publication in his lifetime; nor could he take up his plans for
investigating various other facets of capitalist economy and polity.
Naturally there is a wide array of differing interpretations of Marxs
theory, with Luxemburg for example differing with Lenin, and Ernest
Mandel arguing against Paul Sweezy and others. Available space
does not permit us to review the rich and continuing debate among
these schools; we can only present here in barest outline what we
believe to be the basic Marxian understanding of capitalist crises.

The Ultimate Reason

For many a decade past asserted the Communist Manifesto,
the history of industry and commerce is but the history of the revolt
of modern productive forces against modern conditions of produc-
tion, against the property relations that are the conditions for the
existence of the bourgeois and of its rule. It is enough to mention the
commercial crises that, by their periodical return, put the existence
of the entire bourgeois society on its trial, each time more threat-
eningly. In these crises, there breaks out an epidemic that, in all
earlier epochs, would have seemed an absurdity the epidemic of
over-production. Society suddenly finds itself put back into a state
of momentary barbarism And why? Because there is too much
civilisation, too much means of subsistence, too much industry, too
much commerce. And how does the bourgeoisie get over these
crises? On the one hand, by enforced destruction of a mass of pro-
19
ductive forces; on the other, by the conquest of new markets, and
by the more thorough exploitation of the old ones. That is to say, by
paving the way for more extensive and more destructive crises, and
by diminishing the means whereby crises are prevented.
Marx and Engels talk of an epidemic of overproduction. This is
overproduction of commodities relative to effective demand: more is
produced than can be sold. Thanks to inadequate purchasing power
of the masses, a big chunk of commodities remain unsalable and drag
their owners (producers/traders) down to ruin. This characteristic
feature of capitalism led Marx to remark, The ultimate reason for all
real crises always remains the poverty and restricted consumption of
the masses as opposed to the drive of capitalist production to develop
the productive forces as though only the absolute consuming power [as
distinct from purchasing power A Sen] of society constituted their
limit. (Capital Volume III p. 484, emphasis ours)
The problem thus appears simply as a realisation crisis and
prompts one to ask: why on earth do practical men of business
commit the folly of producing more than they can sell?
Going deeper, we find that crises occur not because capitalists are
fools, nor do they fall from the blue. They are produced in course of
trade/business cycles resulting from a complex interplay of several
partially independent variables, the most important being move-
ments in the average rate of profit. As Marx showed in Part Three
of Volume III of Capital, over a period of time and in the economy
as a whole, this rate tends to fall. Here is how, in brief.

The Tendential Fall in the Average Rate of Profit

We all know that capitalists are prone to use more and better
machinery to boost production and save on labour costs. In Marxist
economic theory this is known as increasing the ratio of constant
capital (plant and machinery, raw materials, various fixed assets,
etc) to variable capital (capital expended on purchasing labour
power variable because this part, unlike the constant part,
grows beyond its own value, i.e., creates surplus value in the process
of production) a ratio which is called the organic composition of
capital. Since live labour is the source of surplus value or profit, re-
placing labour by machinery means a proportionate decrease in the
20
rate of profit for every unit of total (constant plus variable) capital
employed. Suppose a capital worth Rs. 100 crore comprised Rs. 60
crore in constant and Rs. 40 crore in variable capital and the rate of
surplus value was 50%. The amount of surplus value was therefore

21
Rs. 20 crore (50% of Rs. 40 crore expended on variable capital) and
the rate of profit (calculated on total capital of Rs. 100 crore) was 20%.
After say 10 years, the organic composition is increased constant
capital is raised to Rs. 80 crore and variable capital slashed to Rs. 20
crore. The rate of surplus value remaining the same, the amount of
surplus value would be Rs. 10 crore (50% of Rs. 20 crore) and the
rate of profit 10%.
The illustration is deliberately simplified, but the fact remains
that increase in the organic composition of capital and a downward
tendency of the average rate of profit, conditioned by the former,
are the general laws of development of the capitalist mode of pro-
duction. However, reduced rate of profit can go hand in hand with
increased mass of profit if the total magnitude of capital on which
profit is earned is sufficiently increased. And that is what usually
happens in real life. As Marx puts it,
the same development of the social productiveness of labour3
expresses itself on the one hand in a tendency of the rate of profit
to fall progressively and, on the other, in a progressive growth of
the absolute mass of the appropriated surplus-value, or profit; so
that on the whole a relative decrease of variable capital and profit is
accompanied by an absolute increase of both. This two-fold effect
can express itself only in a growth of the total capital at a pace more
rapid than that at which the rate of profit falls. [Capital, Volume
III, p 223]
This has another consequence that has acquired much practi-
cal-political importance in the current context of development debate:
as the capitalist mode of production develops, an ever larger
quantity of capital is required to employ the same, let alone an in-
creased, amount of labour-power. Thus, on a capitalist foundation,
the increasing productiveness of labour necessarily and perma-
nently creates a seeming over-population of labouring people. If
the variable capital forms just 1/6 of the total capital instead of the
former 1/2, the total capital must be trebled to employ the same
amount of labour-power. And if twice as much labour-power is to be
[3] Increased organic composition of capital entails higher productivity of labour
insofar as the same number of workers in the same time period convert an ever-increasing
quantity of raw and auxiliary materials into products thanks to the growing application of
machinery and fixed capital in general. (ibid, p 212) It should be noted that this also means
greater intensity of exploitation, i.e., increased rate of surplus value.
22
employed, the total capital must increase six-fold. (ibid, emphasis
added)
We thus see that the tendential law of falling rate of average
profit does not operate in a simple, linear fashion. It is realised only
in course of cyclical movements of capital, through breakdowns and
restorations of equilibriums. It has its own internal contradictions
and unleashes a slew of countervailing forces or counteracting in-
fluences, such as more intense exploitation of labour, depression
of wages below value, cheapening of the elements of constant cap-
ital, relative over-population (the reserve army of unemployed),
foreign trade (skewed terms of trade and imperialist super profits),
expansion of share capital and to this list prepared by Marx we
must add more modern techniques like monopoly pricing. We should
therefore view the law rather as a tendency, i.e., as a law whose
absolute action is checked, retarded and weakened by counteracting
circumstances (ibid, pp 234-35). In other words, its effect becomes
decisive only under certain particular circumstances and over long
periods.

Other Causes and Contradictory Tendencies

Our stress on the tendency of the average rate of profit to fall
which Marx regarded as in every respect the most important
law of modern economy and the most essential for understanding
the most difficult relations (Grundrisse, p 748) should not lead
one towards a monocausal understanding of economic crises and
business cycles. Crucial other causes are also there, such as anarchy
of the capitalist mode of production which, inter alia, periodically
upsets the conditions of equilibrium between the two main sectors
one producing capital goods and the other producing consumer
goods of capitalist economy. Marx also discussed several auxiliary
factors which influence the specific courses and peculiar features of
particular crises. More important among them are: movements in
wage levels, competition among capitalist concerns, fluctuations in
raw material prices, expectations (or confidence, to use a more
modern term), movements in interest rates and financial turmoil,
trends in international trade, and so on.
23
 The exposition of the internal contradictions of the law takes
Marx to a discussion of certain contradictory tendencies and phe-
nomena which counteract each other simultaneously. He men-
tions a number of such contradictory features such as falling rate of
profit alongside the growing mass of capital, enhanced productivity
alongside higher composition of capital and declares,
These different influences may at one time operate predomi-
nantly side by side in space, and at another succeed each other in
time. From time to time the conflict of antagonistic agencies finds
vent in crises. The crises are always but momentary and forcible
solutions of the existing contradictions. They are violent eruptions
which for a time restore the disturbed equilibrium. (ibid, p
249, emphasis added)
Here we have the most concise description of the essential role
of crises as an inbuilt mechanism of capitalism that, up to a point,
prepares the way for a new upturn, just as a forest fire can prepare
the woodland for a new period of growth. To explain how, Marx
makes another move ahead in his exposition.

Over-accumulation and
Depreciation/Destruction of Capital
Where bourgeois economists see the surface phenomenon of
commodity glut during depression, Marx lays bare the deeper sub-
stance of overproduction/over-accumulation of capital and shows
how this comes about:
A drop in the rate of profit is attended by a rise in the mini-
mum capital required by an individual capitalist for the productive
employment of labour Concentration increases simultaneously,
because beyond certain limits a large capital with a small rate of profit
accumulates faster than a small capital with a large rate of profit. At
a certain high point this increasing concentration in its turn causes
a new fall in the rate of profit. The mass of small dispersed capitals
is thereby driven along the adventurous road of speculation, credit
frauds, stock swindles, and crises. The so-called plethora of capital
always applies essentially to a plethora of the capital for which the
fall in the rate of profit is not compensated through the mass of
profit this is always true of newly developing fresh offshoots of
24
capital or to a plethora which places capitals incapable of action
on their own at the disposal of the managers of large enterprises
in the form of credit. This plethora of capital arises from the same
causes as those which call forth relative over-population, and is,
therefore, a phenomenon supplementing the latter, although they
stand at opposite poles unemployed capital at one pole, and
unemployed worker population at the other.
Over-production of capital, not of individual commodities
although over-production of capital always includes over-produc-
tion of commodities is therefore simply over-accumulation of
capital.(ibid, p 250-51; emphasis added)
Such a situation naturally leads to an unseemly scramble among
capitalists:
So long as things go well, competition effects an operating fra-
ternity of the capitalist class so that each shares in the common
loot in proportion to the size of his respective investment. But as
soon as it no longer is a question of sharing profits, but of sharing
losses, everyone tries to reduce his own share to a minimum and to
shove it off upon another. The class, as such, must inevitably lose.
How much the individual capitalist must bear of the loss, i.e., to what
extent he must share in it at all, is decided by strength and cunning,
and competition then becomes a fight among hostile brothers. The
antagonism between each individual capitalists interests and
those of the capitalist class as a whole, then comes to the surface
(ibid, p 253; emphasis added)
In the age of imperialism this is replicated on an international
scale, with nation states engaged in fierce battles over who is to bear
the brunt of the huge losses. Costs of crises are spread differentially
according to the economic (including financial), political and military
prowess of rival states. Imperialist war being the fastest method
of this destruction appears on the horizon as a real or potential
solution to capitalist crisis.
In whatever manner and through however fierce a struggle the
losses may be distributed among individual concerns (and among
different states or trade-and-currency blocs on the international
plane), the overriding need for returning the system to some kind
of equilibrium has to be fulfilled. And that is fulfilled through de-
struction of part of capital values:

25
 the equilibrium would be restored under all circumstances
through the withdrawal or even the destruction of more or less capi-
tal. This would extend partly to the material substance of capital, i.e.,
a part of the means of production, of fixed and circulating capital,
would not operate, not act as capital
Part of the commodities on the market can complete their
process of circulation and reproduction only through an immense
contraction of their prices, hence through a depreciation of the capital
which they represent. The elements of fixed capital are depreciated
to a greater or lesser degree in just the same way.
definite, presupposed, price relations govern the process of
reproduction, so that the latter is halted and thrown into confusion
by a general drop in prices. This confusion and stagnation paralyses
the function of money as a medium of payment, whose develop-
ment is geared to the development of capital and is based on those
presupposed price relations. The chain of payment obligations due
at specific dates is broken in a hundred places. The confusion is
augmented by the attendant collapse of the credit system, which
develops simultaneously with capital, and leads to violent and acute
crises, to sudden and forcible depreciations, to the actual stagnation
and disruption of the process of reproduction, and thus to a real
falling off in reproduction. (ibid, pp 253-54)
But all this does not, by itself, mean the end of the world. Once
the necessary devaluation has been accomplished and over-accumu-
lation eliminated, normal accumulation can go on:
the cycle would run its course anew. Part of the capital, de-
preciated by its functional stagnation, would recover its old value.
For the rest, the same vicious circle would be described once more
under expanded conditions of production, with an expanded market
and increased productive forces. (ibid, p 255)
But what is normal need not be permanent. Expanded capitalist
reproduction is intensified reproduction of all its contradictions and within
the recurring cycles reside the seeds of violent destruction of the system:
The highest development of productive power together with
the greatest expansion of existing wealth will coincide with depre-
ciation [devaluation] of capital, degradation of the labourer, and a
most strained exhaustion of his vital powers. These contradictions
lead to explosions, cataclysms, crises, in which by momentous
26
suspension of labour and annihilation of a great portion of the
capital, the latter is violently reduced to the point where it can
go on.... Yet these regularly recurring catastrophes lead to their
repetition on a higher scale, and finally to its violent overthrow.
(Grundrisse, p 750, emphasis added).

Credit and Crisis

Drawing attention to a basic contradiction of capitalist accu-
mulation, Marx observed: The credit system appears as the main
lever of over-production and over-speculation in commerce solely
because the reproduction process, which is elastic by nature, is here
forced to its extreme limits, and is so forced because a large part of
the social capital is employed by people who do not own it and who
consequently tackle things quite differently than the owner, who
anxiously weighs the limitations of his private capital in so far as
he handles it himself.
A very realistic explanation of why the financial institutions
behave so irresponsibly with their customers money, isnt it? Marx
goes on:
This simply demonstrates the fact that the self-expansion of
capital based on the contradictory nature of capitalist production
limits an actual free development only up to a certain point, so that
in fact it constitutes an immanent fetter and barrier to production,
which are continually broken through by the credit system. Hence,
the credit system accelerates the material development of the
productive forces and the establishment of the world-market.
At the same time credit accelerates the violent eruptions of this
contradiction crises and thereby the elements of disintegration
of the old mode of production. (ibid, p 441, emphasis added)

27
Migrant Woman and her Children during the Great
Depression, photograph by Dorothea Lange

28
 Crises in the Age of Imperialism

In the age of imperialism or monopoly capitalism (which Lenin

identified as the economic essence of imperialism) or even more in
the post- war era of monopoly finance capitalism (as Sweezy and
Baran had called it) crises, like capitalism in general, have taken on
several new features, requiring us to go beyond Marx and enrich our
understanding in light of the experience of the past hundred years.

Two Types of Crisis

A crisis can be (a) episodic/conjunctural, or (b) structural/ sys-
temic. The former affects only some parts of the system or particular
spheres say financial or commercial -- or this or that particular
branch of production, or a particular group of countries. It can be
dramatically severe the South Asian meltdown of late 1990s or
the dotcom bubble burst in the first decade of the present century
for example yet amenable to a temporary or partial resolution by
means of partial measures without greatly disturbing the existing
modalities and structures of capital accumulation. Such crises are
like great thunderstorms (in Marxs words) through which they
can discharge and resolve themselves, to the degree to which that
is feasible under the given conditions. This is possible because they
do not call into question the ultimate limits of the established global
structure in an immediate sense. However, the underlying deep-seat-
ed structural contradictions of capitalism wait to reassert themselves
again in the form of the next violent eruption. In the process a point is
reached where these contradictions no longer lend themselves to ad
hoc resolution by superficial measurers and their cumulative impact
manifests itself in the shape of a structural/systemic crisis one that
is universal in character (affecting all segments of the international
economy) and global in scope (sparing almost no country/region).
Such is the nature of the crisis we are living through now. It affects
29
the basic structure, the totality of the capitalist system and its very
heart, which in our time lies in the hegemonic financial sector.
Relative to a thunderstorm-like episodic crisis, the time scale of
a structural crisis is likely to be less instantaneous or convulsive
and more extended and protracted; and its mode of unfolding might
be called creeping, although it may start with violent eruptions like
the collapse of Lehman Brothers and other biggies in 2008 and the
Great Crash prefiguring the Great Depression (GD).

History of Structural Crises:

An Outline Sketch
For Marxists the present worldwide structural crisis was not
unexpected. To run and stumble from crisis to crisis, restructuring
the accumulation process to cope with new challenges after major,
epochal ones such has been the mode of existence of late capital-
ism. Looking back on its history since the transition to imperialism
began, we can locate four such structural crises that occurred with
striking regularity at intervals of nearly four decades:
1. The Great Depression (as it was called before the greater
one that struck in 1929) of 1890s was caused primarily by rapidly
shrinking profits resulting from cut-throat competition among
big trusts and cartels. In the US, the Sherman Act, the first major
anti-trust legislation, was therefore passed in 1890. The profitability
problem was sought to be overcome by structural changes like the
rise of big international banks and the emergence of finance capital
through coalescence of bank and industrial capital, domination of
financial oligarchies and other monopolies, speculation overshad-
owing production and export of capital surpassing export of goods,
etc. as Lenin pointed out in Imperialism.
2. These changes led to the hegemony of and restoration of profits
for finance based on overextension of debt and speculation on the
bourses. But the roaring 1920s ended in the great stock market
crash of 1929 and the GD that followed. How this crisis came about
and was overcome we shall discuss shortly.
3. In the 1970s and 80s, the downward movement of profit rates
resurfaced and, compounded by the oil crisis and chronic inflation,
assumed the shape of stagflation. The crisis of the dollar and end of
30
the Gold Standard became conspicuous fallouts of the crisis. Capi-
talism went through another bout of restructuring the neoliberal
globalisation and financialisation (more later).
4. And now this new model of growth is engulfed in a severe crisis
apparently brought about by unscrupulous activities of greedy, too
big to fail banks with full state support, and one that demonstrated
the unsustainablity of credit- driven, bubble-led growth. The quest
for a solution continues, with hardly a ray of light expected at the
end of the tunnel.
This is not purported to be a complete account of the entire his-
tory: for example, we have not touched the role of wars. We have
only tried to show that these epochal crises were watersheds differ-
entiating distinct phases of late capitalism violent ruptures leading
to paradigm changes in its structure, in its forms and mechanisms,
partly obfuscating the essential continuity of this mode of production.
There is another important point, which we have saved for separate
discussion in the last two chapters. It pertains to the impacts of mass
movements, past and present, against attempts of the bourgeoisie
and its state to transfer the entire burden of crisis on to the shoulders
of the working people.
Among the four structural crises, we shall do well to take a closer
view of the GD (and its consequences) and the present crisis. Both
of them, significantly, had their common proximate causes in un-
fettered activities of monopoly finance capital (e.g., debt explosion
and excessive speculation) and in this sense constituted crises of
liberalism liberalism of the old type then and of a new variety now.

From Great Depression to Golden Period

As mentioned above, the big monopolistic banks and corpora-
tions that marked the advent of imperialism at the turn of the 20th
century went about their reckless plunder in a way that led to the
Great Depression. Combined with other factors like powerful strug-
gles of working classes (more on this later) and the political challenge
posed by vibrant socialism, the devastation caused by GD forced the
lords of capital to mend their ways to some extent. This came to be
known as the New Deal (in the United States) and welfare state/
social democracy (in Western Europe).
31
Inequality of Wealth and Income
(From memoirs of Marriner S. Eccles, who served as Chairman of the Federal Reserve
under Franklin D. Roosevelt from November 1934 to February 1948. Here he gives
his own interpretation of the Great Depression.)

As mass production has to be accompanied by mass consumption, mass

consumption, in turn, implies a distribution of wealth -- not of existing wealth, but
of wealth as it is currently produced -- to provide men with buying power equal to
the amount of goods and services offered by the nations economic machinery.
[Emphasis in original.]
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a
few hands an increasing portion of currently produced wealth. This served them as capital
accumulations. But by taking purchasing power out of the hands of mass consumers, the
savers denied to themselves the kind of effective demand for their products that would
justify a reinvestment of their capital accumulations in new plants. In consequence, as in a
poker game where the chips were concentrated in fewer and fewer hands, the other fellows
could stay in the game only by borrowing. When their credit ran out, the game stopped.
That is what happened to us in the twenties. We sustained high levels of employment in that
period with the aid of an exceptional expansion of debt outside of the banking system.
This debt was provided by the large growth of business savings as well as savings by
individuals, particularly in the upper-income groups where taxes were relatively low.The
stimulation to spend by debt-creation of this sort was short-lived and could not be counted
on to sustain high levels of employment for long periods of time. Had there been a better
distribution of the current income from the national product in other words, had there been
less savings by business and the higher-income groups and more income in the lower
groups we should have had far greater stability in our economy. Had the six billion dollars,
for instance, that were loaned by corporations and wealthy individuals for stock-market
speculation been distributed to the public as lower prices or higher wages and with less
profits to the corporations and the well-to-do, it would have prevented or greatly moderated
the economic collapse that began at the end of 1929.
The time came when there were no more poker chips to be loaned on credit. Debtors
thereupon were forced to curtail their consumption in an effort to create a margin that could
be applied to the reduction of outstanding debts. This naturally reduced the demand for
goods of all kinds and brought on what seemed to be overproduction, but was in reality
underconsumption when judged in terms of the real world instead of the money world. This,
in turn, brought about a fall in prices and employment.
Unemployment further decreased the consumption of goods, which further increased
unemployment, thus closing the circle in a continuing decline of prices.
This then, was my reading of what brought on the depression.
[from Beckoning Frontiers (New York, Alfred A. Knopf, 1951)]

32
 Essentially, the rich reckoned the time had come to accept some
sort of compromise and a modicum of regulation, hoping that by
giving up some of their privileges, they would be able to preserve
most of them. Key sectors of the economy, including banking, trans-
portation, electric power, and communications were thus brought
under state regulation. Big corporations began to in the US they
were compelled to by the National Labor Relations Act, known as the
Wagner Act (1935) bargain with labour unions rather than trying
to crush them. Important social programmes such as unemployment
compensation and public health care were created and expanded.
Simultaneously, the Marshall Plan was launched by Washington
to aid the process of rejuvenation of war ravaged economies of Japan,
West Germany and other allies, while the IMF and the World Bank
were set up to help development under US tutelage.
In the US, the marginal income tax rate on the rich rose to 92%
on the highest incomes in the early 1950s. Abandoning the old free
market belief that recessions and depressions would automatically
cure themselves, governments began to intervene more vigorously
(through fiscal and monetary policies for example) to stabilise the
economy and keep the unemployment rate low.
All this, together with other factors like the pent up consumer
demands of war years, ushered in the so-called Golden Age of
Capitalism (194873) which experienced unparalleled growth in
advanced capitalist countries. While evils of imperialism did not
vanish, there was noticeable improvement in the economic conditions
and purchasing power of the working people in these countries,
which helped sustain extended reproduction, but sure enough, not
permanently.

1970s: Crisis Strikes Again

In two to three decades, the space for expansion newly created by
the devastating war was exhausted. From late 1960s and particularly
since the oil shock (1973) which substantially raised production costs,
the bad old maladies began to resurface: overproduction, excess capi-
tal, dwindling profit rates. In the face of heightened competition from
firms in Japan and the newly industrialising countries, employers in
the US and Europe tried to push their labour costs down, giving rise

33
to sharpened conflict between labour and capital. The ruling classes
went on an offensive as we shall soon see both directly (e.g., by
crushing strikes and curbing TU rights) and indirectly through the
state (e.g., transfer of state funds from social programmes to the
private sector in the shape of trade credits, direct subsidies, tax cuts
for corporations and the rich etc.; privatization of public services
which also helped capitalists find investment opportunities for their
excess funds and so on).

34
 Neoliberalism and its Critical Features
This was about when, from mid-1980s onwards, liberalism the
doctrine of absolute freedom of capital from social control returned
with a vengeance in a new shape in a new historical context marked
by the gradual retreat of (a) welfare state/social democracy in Eu-
rope; (b) the actually existing socialisms and (c) nationalist mixed
economies in certain third world countries. Neoliberal capitalism
was born. At first it was better known as Reaganomics and Thatch-
erism, and spread from the US and the UK through the developed
economies and then Latin America to the rest of the world. Theories
like monetarism, supply-side economics, trickledown theory (if top
echelons get rich fast, the wealth will percolate down; so growth
alone and not egalitarianism is to be cared for) etc were used to justify
whatever capital found necessary. Even the name of the system was
sought to be changed from good old capitalism simple yet reveal-
ing to the vague and ideologically cloaked term free market or
market system. Side by side with a patently fraudulent economic
system thus arose what John Kenneth Galbraith called, in the title
of his last book, The Economics of Innocent Fraud (2004).
After more than two decades of good times for the super rich, the
largely deregulated financial system collapsed in 2008, pulling the
global economy down with it. The more important specific causes
responsible for this can be located in three most visible features of
neoliberalism in the advanced economies: international relocation
and reorganisation of production and associated services; enormous
debt traps that caught hold of individual consumers as well nations;
unprecedented dependence on financialisation as a way of circum-
venting stagnation in the productive sector and on asset bubbles
as growth steroids. These are the major factors that first promoted
nearly three decades of economic expansion and then led to a massive
crisis. Let us discuss these in barest outline.
First, the relocation referred above a component of the acceler-
ated global integration of capital, production processes and markets,
briefly called globalisation restored handsome profits for TNCs
but led to huge job losses and relative destitution of the majority
in the advanced capitalist countries. Inequality grew rapidly, as
profits rose while workers real wages fell. Between 1979 and 2007,
35
the average inflation-corrected hourly wage of non-supervisory
workers in the US declined by 1 percent, while inflation-corrected
nonfinancial corporate profits after taxes rose by a remarkable 255
percent. Surging profits pleased the capitalists, but it also gave rise
to a problem: who would buy the growing output that comes with
economic expansion?
The solution was found in easy credit and subprime loans. As
noted earlier, banks and other financial institutions made a fortune
from these practices, while markets for goods and services were kept
up by ordinary people buying with borrowed money. Here is the
second feature of neoliberal capitalism: a veritable credit explosion
and near absolute hegemony of the expanding financial sector. Big
manufacturing businesses diversified rapidly into banking, insur-
ance, real estate, wireless communications etc., which became their
main source of profit. The beginnings of such trends were noted by
Lenin in his time, but now they reached unprecedented proportions.
The repeal of the Glass-Steagall Act in the US (which was passed
in the wake of the crisis of 1930s and prohibited the mixing up of
ordinary commercial banking and the more precarious operations
of investment banking) in 1999 symbolized the almost complete
deregulation of the financial sector. It became extremely complex,
opaque, and ungovernable, with huge banks and financial institu-
tions pursuing ever-riskier activities. Reckless lending was also made
to several nations, giving rise to the phenomenon of sovereign debt
crisis. The US borrowed its way to growth and became the worlds
largest debtor since the onset of the neoliberal era. It is currently
spending more than 8% of its national income on interest payments,
which is expected to rise to 17 % by the end of the 2010s.
The third feature of neoliberal capitalism has been a stagna-
tion-financialization trap4 where a series of big asset bubbles5, such
as the dotcom and then the real estate bubble of the 2000s, tempo-
rarily help overcome the stagnation and then go bust.
Long ago, American economist Hyman Minsky theorized that
cheap credit and easy liquidity would sow the seeds of an asset
[4] John Bellamy Foster and Robert W. McChesney, The Endless Crisis, Monthly
Review Press .

[5] An asset bubble occurs when speculative buying drives the price of some asset,
such as real estate, far above its actual economic value.
36
price bubble and when the inevitable crash came, businesses and
households would find themselves in an over-borrowed situation.
Broadly speaking, this was what happened. The 2000s real estate or
housing bubble created an estimated $8 trillion of bubble-inflated
real estate value, which was about 40 percent of the market value
of homes in the United States. The real estate bubble created ficti-
tious wealth that enabled people to borrow from banks to pay their

37
bills, with their home as security. Household debt grew and grew,
from a manageable 59 percent of household income in 1982 to an
unmanageable 126 percent by 2007. Then the whole house of cards
tumbled down. The banks held trillions of dollars in exotic assets
that lost their value when home prices plummeted suddenly they
were bankrupt. Working people suddenly could not borrow any
more but had to start repaying their debt in 2008, and so their pur-
chasing power fell sharply, leading to a severe economic collapse.
The big crisis had begun.

38
 Crisis of Neoliberalism

In its country of origin, the federal government and the Federal

Reserve bailed out the banks and passed a stimulus bill that stopped
the initial freefall in the economy. Governments across Europe followed
suit. However, precious little was done to solve the problems of the 99%:
high unemployment, low wages, unredeemable debt, homelessness, and
underwater mortgages. Today, corporations have plenty of funds but
hesitate to invest because there is hardly any increase in demand from
cash-strapped or unemployed consumers. The Federal Government is
cutting expenditure under the 2011 austerity deal in the US House
of Representatives, further dampening the markets. The housing sector
is yet to recover from the body blow it suffered nearly five years ago.
In sum, three years after the recovery phase of the business cycle
began, officially ending the Great Recession in the United States in
June 2009, the US
economy continues
to stagnate call
Failure of policymakers, especially those in Europe
it Third Depres- and the United States, to address the jobs crisis and
sion after Paul prevent sovereign debt distress and financial sector
Krugman or The fragility from escalating, poses the most acute risk for
Long Slump, as the global economy in the outlook for 2012-2013. A
Robert E. Hall, the renewed global recession is just around the corner. The
developed economies are on the brink of a downward
then president of spiral enacted by four weaknesses that mutually
the American Eco- reinforce each other: sovereign debt distress, fragile
nomic Association banking sectors, weak aggregate demand (associated
(AEA), said in an with high unemployment and fiscal austerity measures)
address to the AEA and policy paralysis caused by political gridlock and
institutional deficiencies.
in January 2011. In
-
his 2011 bestseller From Executive Summary, World Economic
Situation and Prospects 2012(United Nations
The Great Stagna- Publication)
tion, Tyler Cowen
39
showed that the U.S. economy has been characterized by a multi-de-
cade stagnation that started well before the financial crisis hit the
country. The defining characteristic of the present stagnation is limping,
halting recovery punctured by relapses. This was what the US experi-
enced in the 1930s and Britain did even earlier. Regarding the British
experience, Engels wrote in the middle of the 19th century: a chronic
state of stagnation Neither will the full crash come; nor will the pe-
riod of longed-for prosperity A dull depression, a chronic glut of all
markets for all trades, that is what we have been living in for nearly ten
years. (The Condition of the Working Class in England )
No better is the situation in Europe and Japan. In Japan growth
slowed to 0.3% by the middle of this year. Surveys released on 1 Au-
gust 2012 showed manufacturing activity in the 17-nation euro zone
contracting for the eleventh straight month in July as a downturn that
began in the periphery sank deeper roots into the core, not sparing star
performer Germany or France, the regions second biggest economy.
(By the way, Indias industrial output shrank by 1.8 percent in June
2012). Across the Channel, Britains PMI (purchasing managers index,
computed on the basis of monthly statistical reports from private sector
managers covering items like new orders, output, employment, suppli-
ers delivery time and stocks of purchases) plummeted to a more than
three-year low, shrinking at its fastest rate in more than three years.
GDP growth in the 27 countries of the European Union (EU) has fallen
from 2.4 per cent in the first quarter of 2011 to 0.8 per cent in the last
quarter, according to the Organisation for Economic Co-operation and
Development (OECD) Secretariat. The severity of the downturn can be
gauged from employment figures too.

The Explosive Job Crisis

International Labour Organisations World of Work Report 2011
dubbed chronic high unemployment the Achilles heel of economic
recovery in most developed countries and added, there is a vicious
cycle of a weaker economy affecting jobs and society, in turn depressing
real investment and consumption, thus the economy and so on. This
vicious circle can be broken by making markets work for jobs not the
other way around. However, this is not being done. Recent trends
reflect the fact that not enough attention has been paid to jobs as a key
40
driver of recovery. Countries have increasingly focused on appeasing
financial markets. (Emphasis ours)
Precisely because of this policy orientation, the job crisis is only
worsening. According to the ILO report EuroZone Job Crisis: Trends
and Policy Responses released in July 2012, total employment remains
3.5 million lower than before the crisis. Most alarming, following a
modest recovery in 2010 and 2011, employment has fallen since the
start of 2012 in half of the Eurozone countries for which recent data are
available. The same trend is witnessed in most other countries, and
for the same reason.
According to the World Development Report 2013 released by the
World Bank in September 2012, at a time when the world is struggling
to emerge from the global crisis, some 200 million people including 75
million under the age of 25 are unemployed. The youth challenge alone
is staggering, World Development Report Director Martin Rama said,
adding that More than 620 million young people are neither working
nor studying. Just to keep employment rates constant, the worldwide
number of jobs will have to increase by around 600 million over a 15-
year period.
From peoples perspective the unemployment problem is one of
the most painful manifestations of the systemic crisis and together with
food crisis it presents a grave danger to the system itself. This is best
appreciated by the World Economic Forum (see report on third cover)
and no less concerned are other international authorities.
According to World Bank Chief Economist and Senior Vice Pres-
ident Kaushik Basu, Jobs are the best insurance against poverty and
vulnerability. Governments [he forgot to add: should but do not] play
a vital enabling role by creating a business environment that enhances
the demand for labour. World Bank Group President Jim Yong Kim
said, We need to find the best ways to help small firms and farms
grow. Jobs equal hope. Jobs equal peace. Jobs can make fragile countries
become stable. Such advice, of course, has absolutely no takers among
policymakers hired by monopoly finance capital.
41
 European Sovereign Debt Crisis
One of the novel features of the present round of economic turmoil
is that some countries such as Greece, Portugal in the Euro area have
sunk so deep in debt that they find it difficult or impossible to re-finance
their government debt (i.e., pay interests and repay the principal) with-
out the assistance of third parties like the IMF. This is known as the
European sovereign debt crisis, which has called in question the very
sustainability of the European monetary integration and the future of
the euro. One wonders, how did things come to such a pass?
To be brief, when the common currency (Euro) was created, banks
utilised the opportunity and the euphoria to lend freely to Spain, Greece
and other financially weak nations. This flood of easy credit fuelled
huge housing bubbles, enormous profits for lenders and real estate
dealers, as well as mountains of debt. Then, with the financial crisis of
2008, the flood dried up, causing severe slumps in the very nations that
had boomed before.
Late last year, the European Central Bank (ECB) lent some 489 billion
Euros to European Banks at the extremely generous rate of just 1% over
3 years. The latter are relending from this fund to these governments at

42
10% or more. Why doesnt the ECB lend directly to the governments?
Because an article in the treaty governing ECB forbids it to do that. Ac-
tually the purpose of this particular article was to ensure that the ECB
is not pressured by governments to print money and make loans and
this is understandable. But there should be some flexibility for serious
contingencies like the present one, which is missing.
This rigid rule helps big banks make easy money by borrowing
cheap and lending at high interest. The banks can take the risks because
they know they will be bailed out if their loans go bad. This is one of
many instances showing how vested financial interests formulate selfish
policies that hamper recovery and make life even more miserable for
ordinary people.

Grand Feast for Cannibals

The crisis is no doubt global, but the fundamental law of uneven
development of capitalism remains in operation. Thus on an interna-
tional scale you cannot equate the performance or position of Germany,
US and China for example with Spain, Greece or even France, not to
speak of poorer nations.
Nor can we overlook the enormous disparities in performance
within the euro zone. While Southern Europe is caught in deep, long
depression, German exports in 2011 set a record of a trillion Euros with
its trade surplus reaching 158 billion Euros, that too after a 155 billion
surplus in 2010. (BBC News, 8 February, 2012). Of course, this is not to
ignore recent data on the inevitable German slowdown.
Again, differences in youth unemployment (among jobseekers
between 16 and 25 years) figures are quite pronounced: Spain 48.7%,
Greece 47.2%, Italy 31%, and Portugal 30.8% as against Germany 7.8%,
Austria 8.2% and Netherlands 8.6%. The concentration of high youth
unemployment in Southern Europe explains why mass street protests
are centred there. On the other side of the same coin is the fact that the
great mass of unemployed youth provides a handy tool for employers
to threaten and replace older permanent workers drawing relatively
higher wages.
We should also be careful enough to note that while the working
people and the capitalist system as such are suffering badly, the top 1 %
have sufficient clout and power of manipulation to continue to amass
43
enormous fortunes. Thus in the US, the profit margins of the S&P 500
(top 500 companies identified by the American rating agency Standard
and Poors) leapt from 6% to 9% of the GDP in the past three years, a
share last achieved three generations ago. (Financial Times, 13 Febru-
ary, 2012). Another study reports, US corporate profits are higher as
a share of gross domestic product than at any time since 1950 (FT, 30
January, 2012).
In The Crisis, A View from Occupied America, an essay based on his
opening plenary presentation at the 2012 Left Forum in New York City,
William K. Tabb pointed out: Between 2009 and 2011, 88 percent of
national income growth went to corporate profits, while just 1 percent
went to wages. In terms of personal income, in 2010 (the last year for
which we have data) 93 percent of all income gains went to the top 1
percent of Americans. An early 2012 story in the Wall Street Journal said
U.S. companies are booking higher profits than ever. But Corporate tax
receipts as a share of profits are at their lowest level in at least 40 years.
The crux of the matter is that a mortal crisis did strike the capitalist
class Wall Street bankers in the first place but the neoliberal states
unprecedented massive transfer of wealth from the public treasury to
the corporate sector quickly restored profits for the latter and furthered
the centralisation of capital. Big financial corporations took bailouts
and used them to engage in unscrupulous activities and become even
bigger than before 2007.
Recently, debt defaults on the part of South European nations have
resulted in substantial losses for banks in France, Germany and England
and they are preparing for further haircuts. But while ordinary share-
holders suffer, the corporate honchos know how to fast recover their
losses, if any, and resume the personal accumulation spree.

The Elusive Search for a Solution

Right since 2007, governments have taken a series of measures to
tide over the crisis. Among recent ones, mention must be made of new
financial regulations aimed at reducing global risks, such as the interna-
tionally agreed framework known as Basel III and the Dodd-Frank Wall
Street Reform and Consumer Protection Act of the United States. The Fi-
nancial Stability Oversight Council (FSOC) established under the Dodd-
Frank Act is mandated to identify and monitor excessive risks to the
44
U.S. financial Protests Against Austerity Measures in Greece
system arising,
for example,
from distress or
failure of large
banks or finan-
cial companies.
The European
Stability Mech-
anism (ESM) is
another interna-
tional organisation in formative stage which, if and when it becomes
operational, will provide financial assistance to members of the Euro-
zone in financial difficulty. Critics have noted that the ESM provides
excessive powers and immunity to the board of ESM Governors and
severely curtails the economic sovereignty of its member states.
Central Banks in the US (the Federal Reserve), the UK (the Bank
of England) and the Eurozone (European Central Bank) have taken
recourse to quantitative easing6 with doubtful effectiveness. In the US,
QE3 (3 refers to the third time such measure was taken after the crisis)
announced in September 2012 has become a bone of contention between
Republicans and Democrats. While the latter expect it to stimulate the
economy and create jobs, the former opine that it will only create another
asset bubble and harm the long term interests of the economy.
But all these measures, even bourgeois experts agree, do not ade-
quately address risks in the international financial system and that the
world economy is heading toward a steeper decline than what was expe-
[6] Quantitative easing (QE) means a central bank buying financial assets from com-
mercial banks and other private institutions in order to inject a pre-determined quantity
of money into the economy. It increases the excess reserves of the banks, and raises the
prices of the financial assets bought, which lowers their yield as percentage of the amount
invested. When short-term interest rates are at or close to zero, the conventional policy of
buying up government bonds can no longer lower interest rates. QE may then be used by
the monetary authorities to further stimulate the economy by purchasing assets of longer
maturity than short-term government bonds, and thereby further lowering longer-term
interest rates. But there remains the risk that the policy may prove more effective than
intended in acting against deflation leading to higher inflation, or may not yield the desired
result if banks do not find proper opportunities to lend out the additional reserves. In
the specific case of QE 3 in the US, the primary aim seems to be buying up toxic mort-
gage-backed securities (MBS) as yet another step in the never-ending backdoor bailout
of Wall Street banks and big investors.
45
rienced in 2008-09. The previous economic engines of global expansion
have exhausted their potentialities. Manufacturing in the worlds biggest
economy grew at its slowest pace in nearly three years last July, and the
inevitable correction of the enormous US fiscal deficit (less spending
and more taxes) will worsen the situation from 2013. As for the second
largest economy in the world, Chinese factory output grew at its slow-
est rate in eight months. Overall, the BRIC countries, which provided
a new impetus for growth during the first decade of this century, are
de-accelerating more or less rapidly. With fewer resources, greater debt
and increasing popular resistance to shouldering the burden of saving
the capitalist system, nation states and international organs of finance
capital are at a loss what to do.
Indeed, policy makers are running out of options. Monetary policy
tools such as reduction in interest rates and printing paper money or
electronically generating virtual money have also become ineffective
through overuse. In 2008-09 and thereafter, recourse was taken to
astronomical amounts of fiscal stimulus (mostly for bailing out banks
and then even countries like Iceland and Greece) but that, on top of
previously accumulated debts, resulted in unsustainable budget defi-
cits and public debts in most advanced economies. So much so, that
austerity the opposite of fiscal stimulus became the new mantra.

The Austerity Onslaught

But austerity, i.e., the savage spending cuts in an attempt to
reassure bond markets, have led to growing political instability par-
ticularly in Europe, with the masses hitting the streets and toppling
governments. And why not? The ruling bourgeoisie shamelessly
call upon the working people to suffer the agony of austerity, but
it is their policies that are solely responsible for the mountains of
debt burden on individuals and nations. In the US for example, si-
multaneously with personal and household debt, national debt also
skyrocketed and is projected to hit 75 percent of the national income
in 2012 compared to the post-World War II low of 26 percent when
Ronald Reagan took office, and 40 percent in 2008.
Behind this rise lie three major policy thrusts of the successive
governments: the superpower syndrome that waste enormous re-
sources on military expenditure; huge tax cuts for corporations and
46
the rich, which reduce revenues drastically; and the costly bailouts
of greedy banks. The responsibility thus rests squarely with the gov-
ernment(s).Why then should the public be asked to bear the burden
of so-called austerity now?
Moreover, spending cuts are being imposed at a time when pre-
cisely the opposite policies are needed: a sharp increase in productive
government investment and spending on crucial social programs to
stimulate growth and employment. As the 2011 ILO Report observed,
efforts to reduce public debt and deficits have disproportion-
ately and counterproductively focused on labour market and social
programmes. For instance, cutting income support programmes
may in the short-run lead to cost savings, but this can also lead to
poverty and lower consumption with long-lasting effects on growth
potential and individual well-being. Increasing active labour market
spending by only half a per cent of GDP would increase employ-
ment by between 0.2 per cent and 1.2 per cent in the medium-term,
depending on the country. Moreover, pro-employment programmes
are not expensive to the public purse. ... there is scope for broadening
tax bases, notably on property and certain financial transactions.
Such measures would enhance economic efficiency and help share
47
the burden of adjustment more equitably, thereby also contributing
to appease social tensions.
However, this is not acceptable to the lords of finance. Their
opposition to a financial transaction tax is understandable, but that
is not all. When state funds are routed through private financial
institutions, they can use it for high-risk, high return investments
like lending to Greece and Spain as well as stock and currency
market operations. Direct state expenditure can contribute towards
mitigating stagnation but do not offer this special privilege to high
finance; rather it adds to the worry about unmanageable sovereign
debt. Hence the opposition of governments dominated by bankers
to such rational policies, reflecting a deep mismatch between the
sectarian interests of the finance oligarchy and overall long-term
interests of the capitalist system as a whole.
It is such conflicts of interests between hegemonic monopoly
finance capital and the rest of capitalist society popularly perceived
in the US as a tussle between Wall Street and Main Street that find
expression in the endless policy debates among economists and
policymakers. While some advocate relatively progressive or regu-
latory reforms, others push for pseudo-changes that will safeguard
the interests of the financial sector. Of course, academic debates and
rational arguments do not decide policy orientation. Intra-class (be-
tween different sections of the bourgeoisie) and inter-class struggles
do, with a given national-international political milieu precisely
the balance(s) of class forces in particular countries and on the global
scale also exerting a major influence. Such is the evidence of history,
to which we now turn.

48
 Crisis and Class Struggle
Lessons of History

Crisis always intensifies class struggle. Within the available

space, we can only take brief glances at the most important flash-
points of the crises-class struggle interface, historical junctures which
threw up new challenges for both capital and labour.

American Workers Win New Deal

Preceding and during the GD all kinds of direct action rocked
the USA and tilted the balance of class forces in a way that made
the New Deal possible. Howard Zinn in his Peoples History of
America gives us a graphic account of this process, which is all

Demonstration of the Unemployed in the US, 1931

49
but suppressed in conventional accounts of the period. Here are
stimulating extracts for you:
Democratic Party candidate Franklin D. Roosevelt took office
in the spring of 1933 on the promise of relief from hard times. The
reforms introduced by him had to meet two pressing needs: to
reorganize capitalism in such a way [as] to overcome the crisis and
stabilize the system; also, to head off the alarming growth of spon-
taneous rebellion .
Right since 1931, desperate people were not waiting for the
government to help them; they were helping themselves, acting
directly. All over the country, people organized spontaneously to
stop evictions. Unemployed Councils came up all over the country,
in many cases organized and led by communists. The Councils
function was to prevent evictions of the destitute, or if evicted to
bring pressure to bear on the Relief Commission to find a new home;
if an unemployed worker had his gas or water turned off because
he could not pay for it, to see the proper authorities; and so on. In
Seattle, the fishermens union caught fish and exchanged them with
people who picked fruit and vegetables, and those who cut wood
exchanged that.
Perhaps the most remarkable example of self-help took place
in the coal district of Pennsylvania, where teams of unemployed
miners dug small mines on company property, mined coal, trucked
it to cities, and sold it below the commercial rate. By 1934, 5 million
tons of these bootleg coals were produced by twenty thousand
men. When attempts were made to prosecute, local juries would not
convict, local jailers would not imprison. Breaking through the con-
fines of private property in order to live up to their own necessities,
the miners action was, at the same time a manifestation of the most
important part of class consciousness namely, that the problems
of the workers can be solved only by themselves.
Were the New Dealers Roosevelt and his advisers, the busi-
nessmen who supported him also class-conscious? Did they un-
derstand that measures must be quickly taken, in 1933 and 1934, to
give jobs, food baskets, relief, to wipe out the idea that the problems
of the workers can be solved only by themselves? Perhaps, like the
workers class consciousness, it was a set of actions arising not from
held theory, but from instinctive practical necessity.
50
 Perhaps it was such a consciousness that led to the Wag-
ner-Connery Bill, introduced in Congress in early 1934, to regulate
labor disputes. That same summer of 1934, a strike of teamsters in
Minneapolis was supported by other working people, and soon
nothing was moving in the city. In the fall of that same year, 1934,
came the largest strike of all- 325,000 textile workers in the South.
They left the mills and set up flying squadrons in trucks and autos
to move through the strike areas, picketing, battling guards, enter-
ing the mills, unbelting machinery. Here too, as in the other cases,
the strike impetus came from the rank and file, against a reluctant
union leadership at the top. The New York Times said: The grave
danger of the situation is that it will get completely out of the hands
of the leaders. In the rural South, too, organizing took place, often
stimulated by Communists, but nourished by the grievances of poor
whites and blacks who were tenant farmers or farm laborers, always
in economic difficulties but hit even harder by the Depression. In 1934
and 1935 hundreds of thousands of workers, left out of the tightly
controlled, exclusive unions of the American Federation of Labor,
began organizing in the new mass production industries auto,
rubber, packinghouse. The AFL could not ignore them; it set up a
Committee for Industrial Organization to organize these workers
outside of craft lines, by industry, all workers in a plant belonging
to one union. This Committee, headed by John Lewis, then broke
away and became the CIO the Congress of Industrial Organizations.
But it was rank-and-file strikes and insurgencies that pushed
the union leadership, AFL and CIO, into action. A new kind of
tactic began among rubber workers in Akron, Ohio, in the early
thirties the sit-down strike. The workers stayed in the plant instead
of walking- out, and this had clear advantages: they were directly
blocking the use of strikebreakers; they did not have to act through
union officials but were in direct control of the situation themselves;
they did not have to walk outside in the cold and rain, but had shelter;
they were not isolated, as in their work, or on the picket line; they
were thousands under one roof, free to talk to one another, to form
a community of struggle. In early 1936, when the Firestone rubber
plants in Akron were faced with a wage cut and several union men
were fired, a sit-down strike spread through all the plants. A court
issued an injunction against mass picketing. It was ignored, and ISO
51
deputies were sworn in. But they soon faced ten thousand workers
from all over Akron. In a month the strike was won.
In December of that year began the longest sit-down strike
of all, at Fisher Body plant #1 in Flint, Michigan. For forty days
there was a community of two thousand strikers. There were
classes in parliamentary procedure, public speaking, history of the
labor movement. Graduate students at the University of Michigan
gave courses in journalism and creative writing.
There were injunctions, but a procession of five thousand armed
workers encircled the plant and there was no attempt to enforce the
injunction. Police attacked with tear gas and the workers fought
back with firehoses. Thirteen strikers were wounded by gunfire, but
the police were driven back. The governor called out the National
Guard. By this time the strike had spread to other General Motors
plants. Finally there was a settlement, a six-month contract, leaving
many questions unsettled but recognizing that from now on, the
company would have to deal not with individuals but with a union.
In1936 there were forty-eight sitdown strikes. In 1937 there were
477 even thirty members of a National Guard Company now
sat down themselves because they had not been paid.
The sit-downs were especially dangerous to the system because
they were not controlled by the regular union leadership. It was to
stabilize the system in the face of labor unrest that the Wagner Act of
1935, setting up a National Labor Relations Board, had been passed.
The wave of strikes in 1936, 1937, 1938, made the need even more
pressing. The Wagner Act was challenged by a steel corporation in
the courts, but the Supreme Court found it constitutional.
Now, why did the ruling class accept the rapid growth of unions,
which appear rather strange to us today? The explanation lies in the
difference in situations. In our time the bourgeoisie find non-union-
ized workers more manageable; the opposite was the case in those
days of spontaneous, vigorous class action. Writes Zinn:
Unions were not wanted by employers, but they were more
controllable more stabilizing for the system than the wildcat strikes,
the factory occupations of the rank and file. In the spring of 1937,
a New York Times article carried the headline Unauthorized Sit-
Downs Fought by CIO Unions. The story read: Strict orders have
been issued to all organizers and representatives that they will be
52
dismissed if they authorize any stoppages of work without the con-
sent of the international officers. .. . The Times quoted John L. Lewis,
dynamic leader of the CIO: A CIO contract is adequate protection
against sit-downs, lie-downs, or any other kind of strike. Thus, two
sophisticated ways of controlling direct labor action developed in the
mid-thirties. First, the National Labor Relations Board would give
unions legal status, listen to them, settling certain of their grievances.
Thus it could moderate labor rebellion by channeling energy into
elections just as the constitutional system channeled possibly trou-
blesome energy into voting. The NLRB would set limits in economic
conflict as voting did in political conflict. And second, the workers
organization itself, the union, even a militant and aggressive union
like the CIO, would channel the workers insurrectionary energy into
contracts, negotiations, union meetings, and try to minimize strikes,
in order to build large, influential, even respectable organizations.
Thus it was that the exceptional circumstances of the GD and
of course the double threat of communism in USSR and fascism in
Germany forced upon the American bourgeoisie a relatively ac-
commodating labour policy as one of the major components of the
ND. When the situation improved somewhat after the war, and a
new wave of strikes ensued in 1946, a partial rebalancing was effect-
ed through the Labor-Management Relations Act (or Taft Hartley
Act) passed in June 1947. It amended the Wagner Act, defining, in
particular, unfair labor practices on the part of unions. Thirty four
years later, this very Act would be used by a Republican president
to crush a major strike an event symbolising the rollback of the ND
and initiation of the neoliberal regime.

Reagan and Thatcher Kickstart

Neoliberal Offensive
The crisis of 1970s too saw workers fighting valiantly against job
cuts, wage freeze despite high inflation (which meant reduced real
wages) and other attacks. But they could not hold out for long against
organised capitalist offensive with direct state support. This will
stand out from the following diagram7, which shows the longer-run
[7] Taken from Capitalism Unleashed: Finance, Globalization, and Welfare by Andrew
Glyn, Oxford University Press, 2006, pp 5-6
53
trends in strikes in OECD countries, with year-to-year fluctuations
ironed out by using a five-year average. Strikes are measured as days
on strike per 1,000 workers in industry:
We can see strikes build up from late 1960s (when the golden
age, also known as the period of post-war compromise, was coming
to an end) to mid or late 1970s and then go down a cliff from 1980s.
Symbolic of this long downturn were a couple of strike struggles
in the two countries from which neoliberalism started its world
campaign.
These were the US Air Traffic Controllers strike and the UK
miners strike recognised as defining moments in the post-1970s
American and British workers movements. Both ended in defeat and
emboldened the Reagan and Thatcher governments to go ahead with
their conservative economic programmes, which included wider and
largely successful attacks on the rights and pay raises achieved by
the working class over the past decades. Having inflicted demoral-
ising defeats on the class enemy, capital upheld Reaganomics and
Thatcherism the first versions of neoliberalism as the new global
model of growth.
The Professional Air Traffic Controllers Organization (PATCO)
was a powerful union in the US. Their strength lay not in numbers
but in the absolutely crucial position they held in running the entire
network of air transport and communications. In the 1980 presi-
dential election, this union along with the Teamsters and the Air
54
 NUM Strike, Britain, 1974

Line Pilots Association chose to back Republican Party candidate

Ronald Reagan, who had endorsed the union and its struggle for
better conditions during the election campaign, against Democratic
President Jimmy Carter.
On August 3, 1981, the union declared a strike, seeking better
working conditions, better pay and a 32-hour workweek. They re-
ported sick to circumvent the federal law against strikes by govern-
ment unions. President Reagan immediately declared the PATCO
strike a peril to national safety and ordered them back to work
under the terms of the Taft-Hartley Act of 1947. Simultaneously,
replacements (with supervisors, staff personnel, some controllers
transferred temporarily from other facilities including the military)
and contingency plans were put in place.
Only 1,300 of the nearly 13,000 controllers returned to work.
On August 5, Reagan fired the rest and banned them from federal
service for life. Several strikers were jailed. The union was fined and
eventually made bankrupt. In October 1981 it was decertified from
its right to represent workers.
In the wake of the strike and mass firings, the authorities were
faced with the task of hiring and training enough controllers to re-
place those that had been fired, a hard problem to fix as, at the time,
it took three years in normal conditions to train a new controller. The
55
 PATCO Strike, US, 1981

government was initially able to have only 50% of flights available.

It took closer to ten years before the overall staffing levels returned
to normal.
Reagans tough handling of the strike even at the cost of much
inconvenience to business and general public came in for profuse
praise as well as sharp criticism then and later. Federal Reserve
Chairman Alan Greenspan said in 2003: The President invoked the
law that striking government employees forfeit their jobs, an action
that unsettled those who cynically believed no President would ever
uphold that law. President Reagan prevailed, as you know, but far
more importantly his action gave weight to the legal right of private
employers, previously not fully exercised, to use their own discretion
to both hire and discharge workers. On the 30th anniversary of the
historic crackdown, Michael Moore said that Reagans firing of the
PATCO strikers was the beginning of Americas downward slide.
He also blamed the AFL-CIO for telling their members to cross the
PATCO picket lines. (30 Years Ago Today: The Day the Middle Class
Died, by Michael Moore, Daily Koss, Fri Aug 05, 2011). The same
year, Oxford University Press published Joseph McCartins book,
56
Collision Course: Ronald Reagan, The Air Traffic Controllers, and the
Strike that Changed America.
No less harsh was Margaret Thatcher, the Iron Lady of Great
Britain, in dealing with the miners challenge.
On 6 March 1984, the National Coal Board announced that the
agreement reached after the 1974 strike (which had played a major
role in bringing down the Heath government) had become obsolete,
and that in order to rationalise government subsidisation of industry
they intended to close 20 coal mines. This meant twenty thousand
jobs would be lost. Strikes started spontaneously in several threat-
ened mines. On 12 March 1984, the National Union of Mineworkers
(NUM) one of the strongest unions in the country declared a
national strike and it took effect immediately.
A bit of background information should be in order here. A strike
nearly occurred in 1981, when the government had a similar plan to
close twenty-three pits, though the threat of a strike was then enough
to force the government to back down. In fact, the government de-
cided to avert a strike at that time because coal stocks were low, and
a strike would have had a serious effect. Next year, it offered a 5.2
percent raise based partly on increased productivity. Union members
accepted it, rejecting their leaders call for a strike authorisation. This
clever move enabled the government to stockpile enough coal for
the inevitable future showdown.
The government was thus in a position to take the strikers head
on. On the day after the Orgreave picket of 29 May, which saw
five thousand pickets clash violently with police, Thatcher said in
a speech: what we have got is an attempt to substitute the rule
of the mob for the rule of law, and it must not succeed.... The rule of
law must prevail over the rule of the mob.
The impact of the strike was nowhere near as hard-hitting as
previous strikes such as those of the early 1970s. With most homes
equipped with oil or gas central heating and the railways long since
converted to diesel and electricity. The problem of potential pow-
er-shortages as a result of a coal strike had been recognised by the
Thatcher government which insisted that Britains coal-fired power
stations create their own stockpiles of coal which would keep them
running throughout any industrial action. This strategy turned out
to be incredibly successful during the miners strike, as the power

57
stations were able to maintain power supplies even through the
winter of 1984.
The strike ended on 3 March 1985, nearly a year after it had be-
gun. In order to save the union, the NUM voted, by a tiny margin,
to return to work without a new agreement with management.
The 1980s thus marked the onset of neoliberal offensive by
pushing its class antagonist into the defensive. Globalisation became
the magic word and when the victory sign TINA (There Is No
Alternative) was flashed in a post-Soviet scenario, many if not most
people willy-nilly accepted it.

Popular Rebellions in Latin America

But it was not a permanent defeat; it could not be. Latin America,
the first prey of Western neoliberalism in the Third World, saw the
first series of sustained and effective rebellions against the menace
at the turn of the millennium: the Indian uprising in Ecuador that
ousted the neoliberal president; the insurrectionary waves in Argen-
tina that sent successive presidents packing and developed into a
revolutionary crisis in 2001-2002; the popular uprising in Venezuela
in April 2002 to bring Hugo Chavez back to the presidency after he
was ousted in a military coup; the gas war in Bolivia in 2003 which
saw the neoliberal president being ousted; and so on.
Compared to the sporadic outbursts we see in our country, these
popular movements were much more sustained (not under commu-
nist leadership though) and brought to power forces which opposed
US hegemony and the neoliberal programme to different degrees.
These governments instituted democratic political reforms and partly
restored public control over natural resources (Venezuela from 1999,
Bolivia in 2006, Ecuador in 2007). Even Kirchner in Argentina had to
implement, under popular pressure, certain progressive measures.
Some of these countries most notably Venezuela, Bolivia and Ec-
uador have advanced much further with staggered but persistent
experimentations of building some sort of proto-socialist society.
The World Social Forum (January 2001) also emerged from Latin
American soil and spread to the rest of the world with the anti-TI-
NA slogan Another World is Possible. This was accompanied
by massive mobilisations against the WTO, the World Bank, IMF

58
 Venezuela President Hugo Chavez After the Defeat of the Military Coup of 2002

and the G-8 in Seattle, Washington, Prague and Genoa respectively

between 1999 and 2001.
These struggles gradually flattened out mainly because they
lacked a sense of what was to be done next, and also because they
came more and more under control of dubious Western NGOs. The
WSF in particular, despite its promising initiation, ended up as a
safety valve for letting out some steam of grievances. Having said
this, we must affirm that the movements did help heighten popular
consciousness and activism. On this grounding there developed the
next, present round of confrontations with the neoliberal imperialist
order.

59
60
 Crisis and Class Struggle:
Present Trends and Tasks

As on past occasions, the current crisis has been accompanied

or should we say complemented by powerful mass movements
everywhere against job loss, wage freeze, food crisis, price rise, sub-
sidy withdrawal, corporate capture of natural resources as a means
of legalised loot, and so on. Let us briefly examine some of the more
important dimensions of these political fallouts of the economic crisis.

Lessons of the Occupy Movement

The occupy movement announced the return of agitational pol-
itics in the US in the hands of a new generation, and in a changed
context, drawing inspiration from the then recent outbursts in Spain,
UK and other countries and the concurrent Arab Spring. The strong
and clear battle cry 99% against the 1% reverberated through
America and beyond for the better part of 2011, the international
year of street protests. It featured a rich variety of issues and forms
of struggle. Oakland (USA) for example distinguished itself by or-
ganising highly successful dock strikes and blockades actually it
based the movement on concrete demands of the local dockworkers
rather than on the general 99% slogan.
But why target just 1% ? Does the rest belong entirely to the
working and middle classes? No, the 99% does include many rich
people. But to pinpoint the 1% at the top of the economic pyramid
is to concentrate fire on those who actually command both the econ-
omy and the politics of the United States: those who own controlling
stakes in largest corporations and often double up as influential
senators, highest campaign contributors, advisers to the President,
and so on. As the recently deceased progressive American writer
Gore Vidal said in a BBC interview back in July 2002, One percent
61
owns everything like the CEOs who now seem to be queuing up
to go to gaol! Under them there is a further twenty percent who
support the Empire. These are the lawyers, the journalists, politicians
and bankers and so on. The one percent hires the twenty percent.8
By identifying only the 1% as the main enemy, the slogan seeks to
neutralize the 20% at this primary stage of struggle.
Anyway, what is the present state of the great social movement?
Events like families occupying schools in Oakland to prevent their
closure, Occupiers across the country working to prevent evictions
and foreclosures, are often reported in the independent (non-main-
stream) media. On 17 September, as part of a three-day (15-17)
action programme, protesters converged near the New York Stock
Exchange to celebrate the first anniversary, marking the day they
began camping out in Zuccotti Park. Marches and rallies were or-
ganized in several other cities around the world to commemorate
the day. People joined concerts. Lectures were delivered. But there
is no denying that the very broad movement has fragmented into
several mini-movements, with some preoccupied with ecology,
some with pressing local problems and so on, rarely coordinating
among themselves.
What went wrong? One-sided emphasis on political open-end-
edness, horizontalism in organisation and decision-making by
consensus contributed to the initial successes of the movement but
prevented it from gaining the sharper political focus and strike power
necessary for going over to the new, post-crackdown stage. In the
absence of democratically formulated common goals and a unifying
centre, the enormous amount of social energy that was mobilised
under the Occupy banner remained in the nebulous state for far
too long, failed to solidify and, with the inevitability of a natural law,
got dispersed in a political vacuum.
But energy is never destroyed, it cannot be. It can undergo end-
less transformations and get condensed into solid mass when certain
conditions are present. At the moment part of the occupy energy is
working at local levels as indicated earlier; a part goes into higher
[8] Quoted by Alan Woods in The decline and fall of the American Empire in the
web magazine In Defence of Marxism, 16 July 2002, accessed on 14 August 2012. The
reference to CEOs queuing up to go to gaol is based on the incidence of several top
executives being charged for corruption and/or sent to jail.
62
political actions like protests against NATO and G8 summits; and
probably the major part has been inducted into the Obama presi-
dential campaign under the guise of warding off the threat of a more
anti-people Republican takeover. However, since the basic source
of the movement of 99% the crisis of neoliberal order making life
intolerably harder for the average American is only going to get
worse, it is reasonable to expect that sooner or later the movement
will rediscover itself in a new situation in a new format. A lively
discussion is going on about what is to be done now (see box).
The occupy movement was a spark that did not find the objective
and subjective condition to immediately start a prairie fire. But, with
all its historical limitations, its continuing, even spreading. Many in
the movement are proud to see the Jal Satyagraha in Khandwa district

Excerpts from
Progressives Must Move Beyond Occupy
By Cynthia Alvarez1

17 September, 2012 Countercurrents.org

All human organizations must solve this problem: balancing collective authority
against assigned authority in leadership. Without leadership and written
rules, Occupy cannot take the initiative or go on the attack. The fallacious,
impractical, unrealistic elements of Occupy philosophy ensure it will
never become a viable Progressive fighting force. Only by rejecting these
constraints in favor of organization that facilitates winning will Progressives
be able to build a serious engine of societal reform. Serious Occupiers
who want to re-form society should move to better-organized Progressive
groups. I will subscribe to Occupy networks and might attend Occupy direct
actions. But mainly Ill be looking for other progressive groups who could
actually do something. The Green Party, for example, has inspiring leaders
and a constructive plan for a Green New Deal. Perhaps its time to (finally)
create a national Progressive Party - an umbrella party for all Progressives
that articulates a general Progressive platform and provides the leverage to
move national policy.

[1] A middle-aged college teacher, the author has been heavily

involved with San Francisco Bay Area Occupy groups for the last 10 months
and has written website material for some of them.

63
in MP district of India and protests against the Koodankulam Nu-
clear Power Plant in TN as part of their struggle; why shouldnt we?

Workers, Students and Farmers

Against Neoliberal Offensive
Capital seeks to wriggle out of the crisis and bolster its position
and profits by different means affecting different cross sections of
people, pushing the latter on to desperate resistance struggles.
Right from the days of the PATCO struggle and the UK coal
workers strike, the neoliberal state as the agency of capital has been
trying to snatch the rights and wage levels gained by the working
class through more than a century of bitter struggle at the cost of
much blood and sweat. Naturally workers are fighting back every-
where against these flexible labour policies and labour market
reforms. In our country we have witnessed national industrial
actions as well as powerful struggles of industrial workers in the
Gurgaon-Manesar belt, in Coimbatore and Sriperumbudur in Tamil
Nadu and dozens of other places; of construction workers and other
sections of casual unorganised workers including growing contin-
gents of women workers; of bank and government employees and
so on.

Maruti-Suzuki Strike, Manesar, India, 2011

64
 On top of a
series of mili-
tant movements
throughout the
world, miners
strikes in Spain
in early 2012 and
in South Africa
in August the
latter resulting
in the death of
some 34 work- Miners' Strike, Spain, 2012
ers won widest
popular support at home and abroad. In China, TNCs have long
been accustomed to carrying on super exploitation of the super dis-
ciplined workforce thanks to the absence of an independent trade
union movement, but in recent years workers have started asserting
themselves. The massive clash between workers and security guards
at a Foxconn plant in September was one of many instances.
Severe cutbacks on education budgets as part of the austerity
overdrive and further opening up of the education industry to private
profiteers have emerged as major fighting issues before the global
academic community including students, teachers (recently in Chi-
cago for example) and others. From UK in 2010-11 through Chile,
France and some other countries and this year in Canada students
have placed themselves firmly at the forefront of a spreading youth
rebellion. The Canadian students have earned widespread support
linking their tuition protests to other popular struggles against higher
fees for health care, the firing of public sector employees, the closure
of factories, new restrictions on union organizing, etc.
Worldwide corporate land and resource grab have brought ag-
riculturists (from big farmers through middle and small peasants
to agrarian labourers) and indigenous communities into intense
collision course with capital and its state. Struggles against various
agro- business companies like Pepsi and Monsanto as well as mul-
tinational retail chains like Wal-Mart are also growing.
65
 The Bolivarian Alternative to Neoliberalism
Our survey of struggles against capital in crisis would remain
unpardonably incomplete if we did not mention Latin America.
Because it is here that long and hard struggles on the streets have
culminated in the emergence of popular governments in a number
of countries which try and follow heterodox anti-neoliberal econom-
ic policies to the extent possible in a hostile US-dominated world
economic environment. In Venezuela for example, as James Petras
points out, Despite crime and official inefficiencies and corruption,
the Chavez era has been a period extremely favorable for the lower
class and sectors of business, commerce and finance. This year 2012
is no exception. According to the UN, Venezuelas growth rate
(5%) exceeds that of Argentina (2%), Brazil (1.5%) and Mexico (4%).
Private consumption has been the main driver of growth thanks to
the growth of labor markets, increased credit and public investment.
(Venezuelan Elections: a Choice and Not an Echo, October 4, 2012)
The impressive progress countries like Venezuela, Bolivia, Ec-
uador have made and the difficult challenges they face are too vast
a subject to be covered here, but certainly they are a great source of
inspiration for all who are struggling to break the bondage of capital
and move toward a saner society.

BIG Picture and Basic Message

Behind periodic crises we learned in our brief dialogue with
Marx lurks a complex interplay of myriad forces, the most import-
ant being the epidemic of overproduction or overaccumulation of
capital going hand in hand with increasingly skewed distribution
of income and wealth.
Marx developed a perfectly dialectical approach to crises. On
one hand, they constitute capitalisms inbuilt mechanism for spon-
taneously and ruthlessly eliminating excess or over-accumulated
capital, so that the cycle would run its course anew (Capital). On
the other hand, they achieve this in a manner that paves the way
for more extensive and more destructive crises, and diminishes the
means whereby crises are prevented (Communist Manifesto) and
leads finally to the violent overthrow of the rule of capital (Grun-
66
drisse). It is from this approach that we have tried to comprehend
the crisis of neoliberalism.
The central message emanating from the financial catastrophe
and its aftermath is that global capitalisms strategic response to the
crisis of 1970s has failed. That was a three-pronged strategy com-
prising deregulation or market fundamentalism, globalisation and
financialisation. Since these were the three pillars on which post-
1970s capitalism stood and, in a certain sense, and in certain parts
of the world, flourished the extensive damage they have suffered
have left the whole imposing edifice tottering. This is why there is
no end to aftershocks like the European Sovereign Debt Crisis. This
is why, full five years after the onset of the crisis, the world economy
is still in the doldrums.
But even a systemic crisis like the present one does not necessarily
mean that the system is going to collapse anytime soon. However, if
past experience is any guide, some sort of restructuring is likely to be
in the offing, the basic content and direction (pro- or anti-labour) of
which will depend mainly on the outcome of the class battles de-
fensive and offensive, extra-parliamentary and parliamentary now
raging across the globe. Shall we see
a repeat performance of the masses in
US and Europe forcing respectively
the New Deal and the welfare state
policies on their ruling elites? Will
the non-financial interests among
the bourgeoisie, in league with their
farsighted organic intellectuals, assert
whatever relative independence they
still enjoy to try and put in place regu-
latory policies and reforms that could
salvage some of the lost legitimacy
of capitalism? Or will the financial
oligarchies succeed in dishing out
cosmetic changes in policy that actu-
ally consolidate their own hegemonic
positions and megaprofits?
No, we must not just wait and see.
67
 As we write these lines, the people of India are up in arms against
a booster dose of neoliberal reforms administered by Dr. Manmo-
han Singh and his masters. So are the masses across the world. On
26 September, upwards of 200,000 demonstrators took to the streets
of Athens, as part of a general strike. People, fight, theyre drink-
ing your blood, protesters chanted as they banged drums. Police
clashed with protesters hurling petrol bombs and bottles. The same
day, a 11.5 billion ($14.87 billion) package of spending cuts was an-
nounced as demanded by the countrys international lenders. Almost
simultaneously, thousands besieged the parliament in Madrid and
more than half a million people marched in cities across Portugal to
protest against cuts in social security.
All of us must join the fight with all our might, for a rollback
of the neoliberal policy regime and progressive reform now and
ultimately for a radical transformation of this irrational, oppressive,
inhuman social order.

Workers in Delhi participating in a countrywide strike, 2011

68
 Dystopia, the opposite of a utopia, describes a place where life
is full of hardship and devoid of hope. Analysis of linkages across
various global risks reveals a constellation of fiscal, demographic
and societal risks signalling a dystopian future for much of human-
ity. The interplay among these risks could result in a world where a
large youth population contends with chronic, high levels of unem-
ployment, while concurrently, the largest population of retirees in
history becomes dependent upon already heavily indebted govern-
ments. Both young and old could face an income gap, as well as a
skills gap so wide as to threaten social and political stability.
Two dominant issues of concern emerged from the Arab
Spring, the Occupy movements worldwide and recent similar
incidents of civil discontent: the growing frustration among citizens
with the political and economic establishment, and the rapid public
mobilization enabled by greater technological connectivity. These
trends are evolving differently across developed, emerging and least
developed economies.
In developed economies the social contract that has in recent
decades been taken for granted is in danger of being destroyed.
Workers nearing retirement fear cutbacks in social entitlements they
have grown up to expect, such as state pensions, pre-established
retirement age and guaranteed access to quality healthcare. Mean-
while, young adults in this same group of economies realize that
they are part of a compressed labour force that is expected to support
a growing population of elderly citizens, while bearing the brunt of
austerity measures required to offset growing national debts.
In emerging economies, the context and the challenge is
different. These nations ability to seize the opportunity is far from
guaranteed, given sluggish global growth and reduced demand from
developed economies. Rapid economic growth in emerging econo-
mies has fuelled an impatient expectation that a rising tide will lift all
boats, but social contracts may not be forged quickly enough to recti-
fy increasingly visible economic inequalities and social inequities.
Failure to meet demands for civil and political rights could also
have harmful consequences.
From Global Risks 2012, Insight Report of
World Economic Forum

71
 More than 150 years ago, Karl Marx developed a perfectly
dialectical approach to economic crises. On one hand, they constitute
capitalisms inbuilt mechanism for spontaneously and ruthlessly
eliminating excess or over-accumulated capital, so that the cycle
would run its course anew(Capital). On the other hand, they achieve
this in a manner that paves the way for more extensive and more
destructive crises, and diminishes the means whereby crises are
prevented (Communist Manifesto) and leads finally to the violent
overthrow of the rule of capital (Grundrisse).
Marx showed that capitals frantic endeavour to overcome
inherent constraints like mass poverty and inadequate demand leads
to artificial credit-induced forced expansion or bubbles, which
get deflated sooner rather than later. But this false prosperity built
on debt always bounces back in the shape of sudden crisis much
like a rubber band getting stretched and snapping back resulting
in a recession/depression. Essentially, that is what has been
happening with remorseless regularity, especially since the onset of
the neoliberal policy regime. This booklet seeks to comprehend the
current crisis of neoliberalism from this approach.
But who will bear the burden of the stubborn recession into
which the financial catastrophe of 2008 metamorphosed? The
common people? Or the big banks and corporate honchos
responsible for the breakdown yet bailed out by governments? An
intense struggle to decide this all-important question is now going
on across the world in multiple forms intellectual debates, street
battles and parliamentary struggles. While analysing the historical
context and causes of the worldwide economic woes, the pamphlet in
your hand also sheds light on this live political
dimension of the crisis scenario.

Crisis of Neoliberalism and

Challenges before Popular Movements
by Arindam Sen

A CPI(ML) Publication
October 2012
Price: Rs. 25
Published by: Prabhat Kumar,
Charu Bhawan, U-90 Shakarpur, Delhi 110092 Phone: 91-11-22521067
 India
In the Grip of Deep

Economic Crises

Causes and Quests for Solution

Arindam Sen

A CPI (ML) Publication

 A Perspective on the Global Crisis
(From Crisis of Neoliberalism and
Challenges before Popular Movements)

The Big Picture and Basic Message

Behind periodic crises, said Marx more than 160 years ago, lurks
a complex interplay of myriad forces, the most important being the
epidemic of overproduction or overaccumulation of capital going
hand in hand with increasingly skewed distribution of income and
wealth.
Marx showed that capitals frantic endeavour to overcome
inherent constraints like mass poverty and inadequate demand leads
to artificial credit-induced forced expansion or bubbles, which
get deflated sooner rather than later. But this false prosperity built on
debt always bounces back in the shape of sudden crisis much like
a rubber band getting stretched and snapping back resulting in a
recession/depression. Essentially, that is what has been happening
with remorseless regularity, especially since the onset of the neoliberal
policy regime.
Marx developed a perfectly dialectical approach to crises.
On one hand, they constitute capitalisms inbuilt mechanism for
spontaneously and ruthlessly eliminating excess or over-accumulated
capital, so that the cycle would run its course anew (Capital). On
the other hand, they achieve this in a manner that paves the way for
more extensive and more destructive crises, and diminishes the means
whereby crises are prevented (Communist Manifesto) and leads
finally to the violent overthrow of the rule of capital (Grundrisse). It
is from this approach that we have tried to comprehend the crisis of
neoliberalism.

.. Contd. on 3rd Cover

 INDIA
In the Grip of Deep
ECONOMIC
CRISIS
Causes and Quests
For Solution

Arindam Sen
Director,
Indian Institute of
Marxist Studies

A CPI(ML) Publication
INDIA IN THE GRIP OF DEEP ECONOMIC CRISIS:

CAUSES AND QUESTS FOR SOLUTION

Author:
Arindam Sen
Director, IIMS

February 2014

Price:
Rs. 30

Published by:
Prabhat Kumar
for CPI(ML) Central Committee
Charu Bhawan,
U-90 Shakarpur, Delhi 110092
Phone: 91-11-22521067
 contents

Preface........................................................................................7

I. The Punctured Hot Air Balloon..............................................13

II. Looking Back: State Policy and Economic Growth..........23

III. Two Decades of Manmohanomics.....................................29

IV. A Last-Ditch Effort: Further Deregulation............................45

V. Crony Capitalism and Mega Scams..................................61

VI. Towards a People-centric Development Agenda...........71

Endnotes -...................................................................................82
6
 INDIA
IN THE GRIP OF
DEEP ECONOMIC CRISIS:
Causes and Quests for Solution

Preface

By the turn of the second millennium, the Humpty Dumpty of

neoliberal capitalism had climbed atop a high wall at great risk, en-
joyed sitting there for a while feeling like I am the monarch of all I
survey, and then, inevitably, had a great fall. That was in 2007-08.
All the Kings (there are many across the world today) horses and all
the Kings men tried and tried, but could not put Humpty Dumpty
together again.
The modern-day horses and men the IMF and World Bank, the
OECD and G 20, the US Federal Reserve and European Common
Bank, in our case the RBI and the Ministry of Finance are, howev-
er, desperately continuing with their efforts to put their disparate
neoliberal models of growth back in shape. The outcome so far has
been contradictory.
On one hand, just as modern medical technology has acquired
the expertise to make an old, ailing person apparently on deathbed
walk again (albeit with difficulty and for a limited period) so impe-
rialist states and international financial agencies have been able to
use their enormous economic resources, accumulated over centuries
of exploitation and plunder, to somehow manage the crisis and save
the system without solving the nagging problem of recession,
and at the cost of losing much of its intellectual-moral hegemony
and political legitimacy. Having accomplished this historical feat,
7
however, global financial capital has further consolidated its brutal
domination on world economy at least for the time being.
On the other hand, the very partial success and the worrisome
side effects of the treatment have already started generating, even
among establishment economists in the West, a belated recognition
of the need for some partial course correction; even as popular re-
sistance against austerity measures on the streets in various forms
and at the hustings go on across the world.
We have ventured to capture this entire development in a tril-
ogy on the global economic crisis, of which the present pamphlet
is the third. The first was brought out in February 2009, when the
catastrophic financial crisis had just hit the capitalist world order
and was quickly metamorphosing into a stubborn global recession.
Titled Capital in Crisis: Causes, Implications and Proletarian Response,
it was an introduction of sorts, explaining the intricacies of money
markets and the actual course of the financial near-meltdown and
its aftermath. We outlined a basic Marxist explanation of the prox-
imate as well as fundamental long-term causes and implications of
the crisis and drew attention to the popular struggles engendered
by the economic turbulence.
The second in the series, published in October 2012, and titled
Crisis of Neoliberalism and Challenges before Popular Movements, sought
to show that global experience in the age of imperialism, which Lenin
defined as moribund monopoly capitalism under the domination of
finance capital, brilliantly confirms and enriches the Marxist-Leninist
explanation of business cycles and capitalist crisis. Here we examined
the current turmoil as a specific case and concluded that it was not a
normal recession as part of the usual business cycle, but an epochal
structural crisis in the sense that the basic structures and strategies of
capitalist accumulation in the current neoliberal mode are in crisis,
are permanently failing to deliver the way it did since 1980s. This
is why we named it more specifically as a crisis of neoliberalism. We
also discussed the lessons of the crisis-class struggle interface, since
the great depression and right up to the contemporary movements,
in somewhat greater detail.
The current pamphlet the third and final one in the present
series focuses the spotlight, as the title suggests, on the Indian
theatre of the global crisis.
8
 With GDP growth rate down to 4.8% in the third quarter of
2013-14, less than half of the peak rate (9.9%) attained in 2010-11;
the Indian rupee, which stood equal to the American dollar in 1947,
plummeting to an alarming Rs 65 to a dollar before recovering just
a little; skyrocketing prices and rising unemployment, mounting
trade deficit and foreign debt, the Indian economy is evidently
back to where it stood before the reforms of 1990s were launched.
A couple of lost decades a world record of sorts achieved by the
Congress-UPA and BJP-NDA governments that ruled the country
over these years!
Why does consistent and inclusive growth always elude us? Is
not our country rich in resources, natural as well as human? Yes it
is, but the point is what our system does with these resources. Much
of our bauxite, iron ore and other minerals are routinely exported to
other countries rather than being used here for manufacturing goods
and generating jobs. Indian scientists, professionals and intellectuals
have earned international acclaim in literally every field, but scarcely
do they find here the opportunity or atmosphere to serve the nation.
We are supposed to be an IT superpower, but cannot manufacture a
computer without importing the crucial components from China or
Malaysia. We boast of a demographic dividend, but cannot properly
employ our energetic youth including those with higher education.
Our industrialists are increasingly investing abroad, in spite of huge
concessions doled out to them, because the overwhelming majority
of the huge population are so poor that there is not enough market,
i.e., purchasing power, in this country.
Where is the problem?
The stock official reply is that the problems are inevitable fall-
out of the global recession and will be overcome pretty soon. The
economic fundamentals are quite strong; all that we need is to free
economics from politics and go in for yet another tranche of big ticket
reforms. This stance allows the Indian government to deny the abject
failure of its policies and to use the crisis as a pretext for adopting
the global panacea: more austerity for the working people, more
concessions (incentives) for big business, foreign and indigenous,
and more rigorous market fundamentalism with further withdrawal
of the state from its responsibility of providing the citizens with the

9
bare necessities of life (election stunts like the Food Security Bill
notwithstanding).
But we cannot blindly buy this theory peddled by a pack of thor-
oughly corrupt, selfish, insensitive and inefficient politicians and the
economists and bureaucrats doing their biddings, especially when
their recipe for recovery are clearly turning out to be counter-pro-
ductive. We need to develop an independent understanding of our
own, proceeding from the premise that while the economic woes of
our country are to be analysed in connection with the global crisis
of neoliberalism, it is perhaps more important to grasp the domestic
structural and policy factors responsible for the Indian crisis and to
search for a solution primarily in the national context.
To this end, we have tried in the pages that follow first to mea-
sure the actual magnitude of the unfolding crisis (chapter I), then to
analyse its major dimensions and causes in a historical perspective
(chapters II -IV), followed by an analysis of the official solution
(chapter V) and finally broad outlines of a radical Left alternative
(chapter VI).
We have demonstrated that the last couple of decades have
brilliantly confirmed Marxs observation as summarised by David
Harvey in the Introduction to the 2006 Verso Edition of his book
Limits to Capital (originally written in 1982): In Volume 1 of Capi-
tal, Marx shows that the closer a society conforms to a deregulated,
free-market economy, the more the asymmetry of power between
those who own and those excluded from ownership of the means
of production will produce an accumulation of wealth at one pole
and an accumulation of misery, agony of toil, slavery, ignorance,
brutality, mental degradation, at the opposite pole.
While the general public are groaning under the impact of the
slowdown and recession, cronyism and corruption flourish at an
unprecedented pace and the rich and powerful continue to amass
enormous wealth by overt and covert means. To be sure, this is
neither fortuitous nor a result of bad governance alone. The fact of
the matter is, the growth trajectory followed since independence has
made India into an emerging economic power without eradicating
our feudal-colonial hangovers, that is to say, without challenging the
backwardness and distortions structured into our society.
10
 The cruel contrast between a tiny top that revels in conspicuous
consumption and a massive foundation that produces all the wealth
but remains mired in the dark depths of deprivation is the outcome
of an absolutely unjust social order and a highly skeweddevelop-
ment strategy where agriculture, still the source of subsistence and
employment for the vast majority of our people but weighed down
by the preponderance of a semi-feudal small peasant economy and
caught in a perennial crisis, is allowed to decline; most traditional
industries stagnate while sectors catering to export markets, over-
seas interests or elitist consumption generally tend to thrive; and
speculative activities and real estate sectors are prioritised as engines
of growth while our natural and human resources are increasingly
subjected to corporate-imperialist plunder.
To dismantle this entire policy regime, which can only be done
in the face of violent resistance of the class forces whose interests
it serves and move over to a new model of balanced, egalitarian,
eco-friendly, people-centric and sustainable development such is
the only way to end the crisis and build up, brick by brick, a pros-
perous peoples India. The present pamphlet seeks to clarify for
activists and concerned citizens the basic economics of this urgent
political discourse/movement.

11
12
 I

The Punctured Hot Air Balloon

Around 2004 the Indian economy finally seemed to take off like
a huge Dreamliner and in three years reached the zenith of around
9 per cent plus growth rate. In 2008 it seemed to be passing through
an air pocket and experienced a rude shiver, but somehow managed
to get out of it. But the respite proved to be short-lived. By 2011 it
was coming down, like a leaky hot air balloon. The descent, unlike
the sudden crash of the US economy in 2008, was slow but sure.

In the Throes of Stagflation

The deadly combination of stagnating growth and persistently
high inflation makes India a particularly negative story among
emerging economies. While GDP growth rate remains below 5%,
with industrial production in the organised sector contracting
by 1.8% during October 2013 compared with the corresponding
month of the previous year, the month-on-month retail price infla-
tion touched 11.24 per cent in November 2013. In both cases, most
disturbing was the element of consistency: October was the 12th
consecutive month showing poor industrial growth, while the rate
of retail inflation had been rising continuously from its already high
level of 9.52 per cent in August 2013. Worse still, inflation was no
more restricted to food items but was visible in both manufacturing
and services.
Seen against the 9% average of 2003-08 and the initial aspiration
of 9% plus for the 12th plan (2012-2017) period, the growth figures
are extremely disappointing. That this is a consistent trend will be
evident from the following summary of the growth profile made
available by the Central Statistical Office on 31 May 2013.

13
 Most worrisome perhaps is the rapid decline in the growth
of gross fixed capital formation: from 15.0% in 2010-11 to 4.4% in
2011-12, and to 1.7% in 2012-13. This seems to suggest that a real
turnaround is not likely any time soon.

The Plummeting Rupee

Continuing its steady decline over the past one year and more,
the rupee breached the psychological benchmark of Rs 60 to the
dollar on June 26, touching an all-time low of Rs. 64.13 to the dollar
on August 20, before settling down to Rs 63.25 at the end of the day.
The same day in August it also breached the Rs.100 to the British
pound benchmark and the euro too jumped to Rs 84.66 (from Rs
69.77 on April 2) to the rupee. On August 28 it hit a new record low
of 68.85 against the dollar. Since then it has been hovering around
Rs 61- 63 to the dollar, which is still about 12-14 per cent lower com-
pared to last year.
The government, of course, is putting up a brave face. It seeks to
hide the fact that the weakness of the Indian currency is not a passing
shadow, that it is a reflection of the countrys bad economic performance
in an overall sense as expressed in so many indices like the sharp fall
in GDP growth rate.
In a more direct or immediate sense, the nosedive in the value of rupee
stemmed from the widening current account deficit (CAD) on Indias
balance of payments (BoP) on one hand and the burgeoning external debt
on the other, both of which contribute to dwindling international
investor confidence and had already provoked an exodus of foreign
investment. The number of PE (private equity) investors in India from
abroad has shrunk by 20% over the last two years. In FY (financial
year, which is counted in India from April to March) 2012-13, For-
eign Direct Investment (FDI) was down 38 percent from 2011-12. As
14
per the simple rule of demand and supply, the short supply of the
dollar the international currency makes it dearer in rupee terms,
while increased speculative activities on the currency markets in
crisis periods make matters worse.
As for the galloping CAD, two major factors are notable. First,
a near 90% jump in annual gold imports (this by itself is suggestive
of an economy in doldrums, because the yellow metal has always
been the preferred asset of wealth-holders in times of extreme un-
certainty) was one of the main causes for the trade deficit rising to
$20.1 billion in April this year from $16.9 billion in May last year.
The second factor is our huge oil import bill. With more than 80%
of the oil requirements being imported, depreciation of the rupee is
putting tremendous pressure on the national exchequer, which is, of
course, being transferred to the common man in the form of higher
oil and gas prices. Moreover, fuels being a universal intermediate,
the higher prices of fuels enter into all other prices directly in pro-
duction costs and also by affecting transport costs. It not only hits
the common person with skyrocketing prices, but raises the prices
of Indian exports too. So the expected advantage of a depreciated
rupee in terms of export growth accrued to India only belatedly and
partially. The net result was that Indias CAD increased sharply from
less than 1% of GDP in the first half of the 2000s to 2.7% in 2010-11
to 4.2% of GDP in 2011-12, and to 5.1% in 2012-13. This is much
higher than the 3% (of GDP) recorded in 1990-91, i.e., at the time of
the crisis of 1991.
Another proximate reason why the rupee declined so sharply was
the US Federal Reserves hint in early June this year that it could roll
back its monetary stimulus, i.e., easy credit policy. For India the im-
plication was that this would make external commercial borrowings
(ECBs) much more costly for the Indian corporate houses and will
harm foreign investors too. This possibility intensified speculative
pressure on the rupee and, as noted above, pushed it beyond the Rs
60 benchmark. When, on July 11, the US Federal Reserve Chairman
Ben Bernanke made a reverse comment to the effect that the state of
the US economy wont allow him to withdraw the easy money policy
immediately, the rupee recovered to 59.32 per dollar. A second hint
of monetary tightening in mid-August provoked the till then biggest
fall of the rupee in currency markets as noted above.
15
 But how does the appreciation and depreciation of the Indian
currency relate to the US monetary policy? Actually what has been
happening for quite some time, particularly since the abolition of
capital gains tax in the 2003-04 budget, is this. Foreign Institutional
Investors (FIIs) borrowed in dollar markets, where liquidity was in
abundance and interest rates very low, and invested in stocks and
commodity markets and real estates in developing countries, where
returns were high, so as to earn huge profits by borrowing cheap and
getting higher returns on these investments. The Indian government
relied on these foreign investments to balance the CAD and support
the rupee. During 2003-08, capital inflows averaging $45 billion per
year easily wiped out the up to $15 billion CAD and exerted upward
pressure on the rupee. It began to appreciate, reaching a record high
of less than Rs.40 to the dollar in April 2008, and the Sensex too shone
brilliantly thanks to enhanced inflows of footloose finance capital.
In the wake of the global financial crisis, however, international
players found it necessary to book profits by selling their stakes in
Indian markets and take the money out of this country to meet other
obligations. This contributed to a drop in Sensex, declining GDP
growth rate and a depreciating rupee, which fell to Rs.52 to the dollar
in just one year, that is, by March 2009. Since then the downward
trend in the exchange value of rupee has continued.

Faultlines of Footloose Foreign Capital

Even as the CAD has been high, we have been able to finance
it because of a combination of push and pull factors. On the
push side is the amount of surplus liquidity in the global system
consequent upon the extraordinary monetary stimulus provided
by advanced economy central banks....In trying to finance such
a large CAD, we are exposing the economy to the risk of sudden stop
and exit of capital flows. This will be the case to the extent capital
flows in pursuit of short-term profits. Should the risk of capital
exit materialise, the exchange rate will become volatile causing
knock-on macroeconomic disruptions.
D. Subbarao: Indias Macroeconomic Challenges: Some
Reserve Bank Perspectives, RBI Bulletin, April 2013 (emphasis
added)

16
 In the era of global integration of financial markets, the inflow
of finance capital thus depends considerably on the US credit/
monetary policy going down when credit gets or is likely to get
tighter and rising when there is abundant liquidity. Depending on
these volatile flows can be dangerous, as the RBI pointed out early
last year (see box).
In plain English, with a possible drying up of unpredictable in-
flows, our country may find itself without the wherewithal to absorb
the huge deficit and therefore in the grip of a sovereign debt crisis
as experienced by Greece.
Anyway, from the extremely abnormal height of 6.5 per cent of
GDP in Q3 of 2012-13, CAD came down to a still quite uncomfortable
3.6 per cent in Q4. There were several reasons behind this. As the
RBIs Financial Stability Report (FSR) released on 30 December 2013
observed, the delay in tapering in the U.S. Federal Reserves bond
purchase programme allowed India to bring about adjustment in
CAD and build buffers by replenishing its foreign exchange reserves.
In the second half of 2013 the import duty on gold was increased from
6% to 8% and then to 10%, resulting in a decrease in import. Thirdly,
as mentioned above, to a limited extent the weak rupee helped boost
exports while a sluggish economy dampened growth in imports.

Mounting Foreign Liabilities

Coupled with the plummeting currency, another major concern is
our growing external debt, which rose to $390 billion as of March 31,
2013 showing a 12.9% increase over the level at end-March 2012. The
external debt to GDP ratio increased to 21.2 per cent at end-March
2013 from 19.7 per cent at end-March 2012. By end-September 2013
external debt just crossed the 400 billion mark.
In end-March 2012, Indias foreign exchange reserves covered
85.2% of our external debt; exactly a year later, it covered only 74.9%
and dropped further to 69.3% at end-September. Nearly half of it
($172) consists of short term debt maturing around March next year.
This is more than thrice the figure ($54.7 billion) in March 2008.
An important cause of this surge in short term external debt
is large-scale borrowings (mostly debts of 5 to 7-years maturity)
by Indian corporates at very low interest during the boom years
17
of 2003- 2008. What the declining rupee means for these corporate
borrowers is that they will have to pay back much more in rupee
terms for every dollar they had borrowed. Naturally, they have
pressed the panic button, which has set the alarm bells ringing in
the corridors of power.
From the national perspective, no less worrisome are ournetex-
ternal liabilities, i.e., international assets (Indias loans to others and its
investments abroad) minus international liabilities (Indias external
debt and foreign investment in India). This figure has grown dramat-
ically from $66.6 billion in March 2009to$282 billionby December
2012 a fourfold increase in less than four years! The servicing of
the fresh foreign liabilities adds to the current account deficit, which
may necessitate even larger capital inflows in the next round.
But we have adequate foreign exchange reserves vis--vis our
foreign debt, ministers and officials never tire of assuring us. What
they do not say is that these reserves have been built up from inflows
of foreign debt and investment, on which India pays high returns;
whereas the reserves have to be invested abroad in secure assets such
as US government debt, on which India earns very low returns. As
N.K. Chandra pointed out in 2008, the net annual drain on account of
foreign investment and debt by end-2007, as a percentage of Indias
annual national income, was comparable to the percentage drained
annually from India under the British Raj.1

Skeletons in Bank Vaults

In the US and other advanced nations, reckless business prac-
tices of ultra-greedy financial institutions led to a banking crisis in
2007-08, which then metamorphosed into a recession. In our case it
is the economic downturn that has put the banking system under severe
stress today. It now transpires that the banks public sector banks
(PSBs) in particular have been lending irresponsibly to big private
entities and showing excessive leniency in recovering the loans and
interests. The upshot has been a huge growth in non-performing
assets (NPAs) and restructured accounts (cases where repayment
of the principal and/or the rate of interest have been rescheduled
to help the borrower) of Indian banks, with huge outstanding dues
from the power, real estate, textiles and infrastructure sectors.

18
 The overall picture is captured in the box below, but let us first
look at a couple of specific cases.
Punjab National bank saw its bad loans rise by 4035 crore, or
40%, in the quarter ended December 31, 2012 while bad debts of
Indian Overseas Bank rose by about 20%. The net profit of the latter
shrank by 88 per cent to Rs 59 crore for the quarter ended March 31,
2013, against Rs 529 crore in the corresponding quarter last year. The
decline was an outcome of provisioning for bad and doubtful debts
and restructured/stressed accounts. During 2011-12, total NPAs of
PSBs as a whole grew by Rs.39000 crore compared to only Rs.5000
crore in the case of private banks. State Bank of Indias gross bad
loans increased to 5.56% of its total loans as of June 30 last year2 from
4.75% on March 31.
As the Reserve Bank of Indias latest Financial Stability Report
(FSR) released on 30 December 2013 pointed out, Banks are more
at risk now than six months ago with a jump in both bad debts and
restructured loans. Loans worth Rs 74,000 crore for 77 customers
have been recast by the corporate debt restructuring (CDR) cell in
the 12 months to December 2013, the largest amount reworked in
any year. At Rs 3.25 lakh crore, the total stressed advances ratio rose
significantly to 10.2 per cent of total advances as at end September
2013 from 9.2 per cent of March 2013. Moreover, inter-linkages among
banks heighten the risk of what is called the contagion effect, where
even one large house failing to honour its commitment might cause
havoc in the entire banking system. The RBI also admitted that part
of the problem was banks large exposures to big corporates. In sum,
Indian banks which were small but less risk-prone compared to their

19
huge Western counterparts, are rapidly shedding that distinction as
they grow bigger.

Kingfisher, Deccan Chronicle and Sahara:

Upstarts Going Down
Rapidly rising NPAs and restructured loans (RLs) on banks
books are also expressed as alarming loan burdens on business
houses. The case of Kingfisher Airlines Ltd. (KAIR) is telling. The
carrier is controlled by billionaire Vijay Mallya, who was elected to
the Rajya Sabha in 2002 and 2010 as an independent candidate from
his home state of Karnataka. He received several awards both in India
and overseas including the Entrepreneur of the Year at The Asian
Awards, 2010. Ironically, that very year his airline was on the verge of
collapse. He managed to avoid that by restructuring the 77.2 billion
rupees of debt KAIR had run up buying airliners and adding routes
during the economic boom. In April 2011 a significant part of the
loans was converted into a 23 per cent equity stake in the airline, in
order to reduce its interest and amortisation payment commitments.
Very soon the carriers equity became almost worthless, inflicting
a huge loss on the lenders. Yet the latter generously restructured
the loans, offered better terms, extended repayment periods, and
provided more credit to keep the unit afloat. A classic case of what
economists call sending good money after bad!
With its financial situation going from bad to worse, in October
2012 the airline grounded its entire fleet after pilots went on strike
to demand seven months of unpaid salaries, even as the company
engaged itself in an out-of-court loan-restructuring process. Towards
the end of the year he made news again by presenting three kilograms
of solid gold to a temple as puja offering although he was not paying
his Kingfisher employees their overdue salaries.
In February 2013, after a lot of legal wrangling, the lenders em-
barked on the way to liquidate the collateral and guarantees provided
by the borrower to recover as much of their loans as possible. The
process continues and it seems only a fraction of the sum involved
will be ultimately recovered.
Another example of near-bankruptcy is the Deccan Chronicle
Holdings Ltd (DCHL), better known as the owner of the newspa-

20
per Deccan Chronicle, erstwhile IPL cricket team Deccan Chargers,
papers like Asian Age and Financial Chronicle as well as several other
businesses. DCHL availed loan and credit enhancement facilities
from Canara Bank totalling Rs 330 crore from August 2006 till March
2012. With continuous defaults, the bank declared the DCHL loan as
non-performing asset in September 2012. It was also alleged that the
company was trying to sell away the properties that were mortgaged
to the bank. Interestingly, just a month before Deccan Chronicle was
found fibbing about its assets, agencies like CRISIL were giving it
high investment rating.
In mid-February last year, bank accounts of Sahara Group chief
Subrata Roy and two Sahara Group firms were ordered to be frozen
by SEBI. Immovable properties in the name of Subrata Roy were
also attached. The market watchdog took these steps after being
prompted by the Supreme Court, whose repeated instructions to
Sahara Group firms for depositing the more than Rs 24,000 crore for
refund to investors were ignored. The point that was not raised was
what the SEBI and the RBI were doing all these years when various
illegalities were being committed in raising of these funds from
ordinary people who thought their interests were safeguarded by
the two regulators.
The cases of Kingfisher Airlines, Deccan Chronicle Holdings and
Sahara show how credit lines were extended even when they were
bleeding and there was no prospect of them returning the money.
All three companies are now engaged in a slew of legal battles filed
by creditors.
However, such high-profile cases constitute only the tip of the
iceberg. The combined debt of the top 10 business groups in India
grew over five times in the past five years, from Rs 99,300 crore to
Rs 5,39,500 crore. Indicating a trend of the times, when the likes of
Adani, GMR and Vedanta were piling on debt, they were furiously
acquiring assets all over the world. Adani bought mines in Southeast
Asia and Australia, GMR was building the Mal airport in Maldives
(where it acted most irresponsibly, leading to the cancellation of the
contract) and Vedanta was busy snapping up companies everywhere.
The total debt of these ten groups accounts for 13% of the bank loans,
while the total volume of highly risky (from the standpoint of lending
banks) corporate debt runs into Rs. 3.6 trillion.
21
 All that Glitters
So, from the plummeting rupee to the stressed banking system,
trends are alarming indeed. But has not the Sensex been doing rea-
sonably well despite the slowdown? Well it is, largely due to the
cheap credit and easy money policies in vogue in the developed econ-
omies, which prompt investors to raise money at home at near-zero
interest rates and use part of that to make portfolio investments in
emerging economies at a much higher rate of return. So the Sensex
remains high before the world crisis, most of the time it was hov-
ering around 20000, and following a steep but brief decline has been
fluctuating in the 15000-20000 range since June 2009. But that does
not in any way indicate strong fundamentals in the Indian economy,
as we have seen above and shall see in the pages that follow.
So, the glittering Sensex notwithstanding, it is a stubborn and
all-pervasive stagflation that the Indian economy finds itself in.
Where has all the growth gone and why? A very pertinent ques-
tion, it begets another: where did it come from and how? The stock
official answer, and the reigning consensus among establishment
economists, is that the high growth rates of recent years resulted
exclusively from the grand bold restructuring initiated in 1991 (and
can be restored by more daring reforms now).
Is it really that simple? Well, let us investigate.

CFMNZhvwQ

22
 II

Looking Back: State Policy and

Economic Growth

The neoliberal assertion that our country entered a relatively

high growth track only since the nineties is contradicted by facts
of history. Actually Indias growth story has passed through two
distinct phases, both marked by very different policy regimes corre-
sponding to the international trends of the times, with a transitional
intermediate phase in the 1980s. Each phase initially yielded better
results compared to the previous one but ended up in a crisis sooner
or later, thereby calling for a policy shift. Actually in this respect the
experience of the latest (post-1991) phase is not all that different from
the preceding ones, as we shall see in the next chapter.

Early 50s to late 70s:

Hindu Rate of Growth and Nehruvian Socialism
The so-called Hindu rate of growth3 (an average 3.5% annually)
of the first phase (1950-80) was, it is scarcely remembered, five times
the average rate of growth (0.7% per annum) during the 30 year
period from 1917 to 1946. The latter, of course, was an exceptionally
difficult period marked by world wars and the Great Depression, but
it was also more than double the 1.5% per annum growth achieved
during the normal period of 1900 to 1913.4 If attainment of political
independence and stoppage of direct colonial plunder (which con-
tinued by various indirect means all the same) was the fundamental
23
reason behind this progress, some credit was also due to the Neh-
ru-Mahalanobis development strategy.
This strategy took industrialisation as the main lever of devel-
opment and assigned the state a very prominent role in it through
five-year plans. It was also marked by (a) regulated promotion of
private capital preventing cut-throat internal competition through
licensing and other control devices and (b) protection from foreign
capital primarily through a restrictive trade regime and regulation
of foreign investment through the Foreign Exchange Regulation Act
(FERA). Purely financial investments were discouraged or banned;
some sectors were kept out of the purview of foreign investors while
caps on foreign equity holding were set in others; terms for technol-
ogy transfer were regulated and foreign partnership with domestic
capitalists was prioritized over FDI. These steps were necessary, at
least deemed necessary, for the protection and growth of Indias
infant industries.
This period, particularly the first half (1950-1965) saw consider-
able progress in basic industries, mining and power generation in
the public sector and that facilitated development of light industries
in the private sector. The continuing neglect of agriculture, howev-
er, began to exact a very high price particularly since the middle of
1960s in the form of acute food crisis, price rise and unemployment
problem, generating waves of militant mass struggles and armed
peasant upsurges under revolutionary communist leadership.
The ruling clique tried to meet the twin challenges of economic
crisis and political unrest by taking recourse to measures like na-
tionalisation of commercial banks and certain other sectors like coal
mining and the green revolution as well as political intrigues and
repressive measures, but never came to grips with the situation. To
make matters worse, the four-fold hike in international crude prices
in 1973 resulted in massive increases in petro-products (including
fertilisers) prices as well as in the general price level (by as much as
22% in 1972-73 alone). Foreign exchange reserves were drained and
recession deepened further. It was amply clear that the Nehru-Indira
model had come to a dead end and some sort of reform was needed.

24
 1980s: Initial Steps to Reforms
And that was inevitably attempted when objective conditions
matured in the mid-1980s. On the world scale the Soviet model was
rapidly losing its shine while neoliberalism had started replacing
social democracy/welfare state frameworks; on the national stage the
removal of Indira Gandhi5 and the massive mandate received by the
pragmatic third generation ruler of the Nehru-Gandhi clan helped
economic policy to start coming out of the old, worn-out framework.
Material prerequisites had also matured by then. With state stew-
ardship and assistance, the flabby Indian capitalist class gained the
minimum economic muscle needed to step into the basic industries
hitherto earmarked exclusively for the public sector in the Industrial
Policy Resolution of 1956. Accordingly, the heavy/basic industries
sector was gradually opened up to them. In the mid-1980s FERA was
partially relaxed and foreign collaborations were more encouraged
than before. Fiscal discipline was loosened, so the government could
boost spending by taking advantage of the enhanced availability of
foreign loans and investment. Easy accessibility of foreign finance
also allowed large-scale import of food and other essential items to
ward off price rise and resultant discontent. Thanks mainly to in-
creased state spending and newly introduced incentives including
tax concessions to industrialists, the Rajiv years saw an impressive
8% per annum growth in industry and average GDP growth rate
surpassed the five per cent per annum mark for the first time.
The carefully calibrated relaxation or liberalization of 1980s
would by its own logic lead to further restructuring sooner or later;
in 1991 an opportunity presented itself, as is the norm in capitalism,
in the shape of a crisis!

Crisis of 1991 and Big Bang Reforms

The accelerated growth since mid-1980s was achieved at the
cost of (a) heavy domestic borrowing, which pushed the gross fiscal
deficit of governments (at the centre and in states ) to 12.7% of GDP
by 1990-91 (b) since these deficits had to be met by borrowings, the
internal debt of the government accumulated rapidly, rising from
35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the
end of 1990-91 and (c) foreign exchange reserves which stood at $1.2
25
billion in January 1991 was depleted by half by the middle of the
year, barely enough to last for roughly 3 weeks of essential imports
(in other words, India was only weeks way from defaulting on its
external balance of payment obligations). The caretaker government
under Prime Minister Chandra Shekhar secured an emergency loan
of $2.2 billion from the International Monetary Fund by pledging 67
tons of gold as collateral, which was airlifted to London.
There was a public outcry when it was learned that the govern-
ment had pledged the countrys gold reserves against the loan but,
as Montek Singh Ahluwalia would write later, the historic crisis
became an opportunity for unveiling more systemic economic
reforms.6 The main components of the Structural Adjustment
Programme (SAP) prescribed by the IMF and executed by its man
Friday Manmohan Singh were (a) fiscal correction through stringent
austerity measures, (b) tightening of monetary policy and devalu-
ation of the rupee, (c) gradual dismantling of the license-permit raj
and opening up of all sectors of the economy to private investment,
both Indian and foreign, and (d) liberalisation of foreign trade and
investment followed by the replacement of FERA with a toothless
Foreign Exchange Management Act (FEMA) in 2000.
The new spate of reforms, however, did not provide any signifi-
cant fresh impetus to growth in the short or medium run. It stayed
at 5.8% during 1990-96 and at 6% when the entire decade of 1990s is
considered only slightly higher than what was achieved in 1980s. It
was only since 2003-04 that a new level of high growth was attained,
and that for no longer than five or six years.

Different Policies, Same Purpose

An important question arises at this point: how do the different
phases relate to one another and how do we characterise them? Inter-
estingly, authors who emphasise the role of the 1991 reforms (Arvind
Panagariya in India: The Emerging Giant (2008) for example) tend to
belittle the first tranche of liberalisation in 1980s and the noticeable
rise in growth rate that accompanied it; while those who take due
note of the latter often view this as a departure from socialism.
Thus Arun Kohly in his latest publication Poverty Amid Plenty in the
New India (New Delhi, Cambridge University Press, 2012) views

26
the change that took place in 1980s as a shift away from socialism
(p 12). Similarly, in his entry on Growth Experience in the Oxford
Companion, B Subramanian writes that in the 1980s The Congress
went from being hostile to private business to mildly supportive and
eventually quite supportive7.
But was the ruling Congress or the Central government really
anti-business in the pre-1980 period?
Well, a keener observation from the Marxist viewpoint would
reveal that it was not. One of the first to draw attention to this car-
dinal fact was Charu Mazumdar. At a time when official Marxists
were eulogising the state sector as a socialist element in the mixed
economy, he pointed out as early as in 1965 that the public sector
actually served the interests of private capitalists. The latter need-
ed the products of basic industries for setting up light industries
geared to quick profits, but could ill afford the heavy investments
and long gestation periods required for founding steel, coal, power,
petroleum and such other industries on the required scale. To fill
this gap and to supply steel, power etc. on a non-profit basis or even
at subsidised rates to the private sector such was the role assigned
to the public sector in the first phase of development of capitalism
in independent India.
Indeed, there was nothing socialist about it. Nor was there an
iota of hostility to private, including foreign, business interests on
the part of Congress government, except perhaps in platitudes of
economic nationalism and mixed economy, which were politically
correct as well as economically advantageous in those early years of
the Republic. And the policy shifts in 1980s as well as in early 1990s
only marked separate junctures in the same continuous evolution of
capitalism in India, with the state always trying to faithfully promote
the interests of monopoly big bourgeoisie with different policy regimes
suitable in different national-international contexts. As regards attitude
to foreign capital, tensions in government policy often reflected
conflicts within Indian bourgeoisie itself. As Sojin Shin points out, in
the early 1990s the Associated Chambers of Commerce & Industry
(ASSOCHAM) argued in favour of the need for free flow of foreign
investment while the Federation of Indian Chambers of Commerce
and Industry (FICCI) opposed the liberalisation of FDI policy. The
FICCI, whose membership is dominated by the indigenous business

27
groups, felt that the final judgment on whether or not such invest-
ment is desirable should be left to the Indian entrepreneurs. The
so-called Bombay club, comprising a section of Indian big business
represented by the Bajaj, Birla, Thapar, Modi, Godrej, Singhania and
some others, also voiced some initial resistance.8
With this overall historical perspective, let us now survey the
present policy regime, including the genesis of the current economic
crisis in India.

CFMNZhvwQ

28
 III

Two Decades of
Manmohanomics 9

About a decade after US President Ronald Reagan flagged off

the Neoliberal Express from Washington DC, it finally reached New
Delhi in 1991, with Finance Minister Manmohan Singh at the drivers
seat. Just as in the 1950s and 1960s the strong appeal of socialism
in India and abroad was utilised by the bourgeois-landlord state
to give a socialist tinge to the mixed economy, so the new set of
reforms drew legitimacy from the neoliberal TINA (There Is No
Alternative) gospel.
As the crowning glory of this policy regime, people often talk of
the exceptionally vibrant growth achieved during 2003-04 to 2009-10.
Not only in terms of GDP growth but on some other indices too, new
ground was really broken. Growth was no longer restricted to the
services sector, but after a long gap extended also to manufacturing.
Savings and investment grew at unprecedented rates. Along with
liberalization of import and foreign investment rules, in certain sec-
tors technology improved too. This served to intensify competition
and led to major improvements in productivity. Indian corporates
were reaching out to foreign lands with great gusto no longer only
to underdeveloped countries but to advanced economies as well
mainly through the merger and acquisition (M & A) route though.

How a Mini Bubble Was Generated

To a significant extent the high growth was an externally in-
duced (rather than internally generated) phenomenon. After China,
India had become one of the most favoured destinations of financial
inflows while many other developing countries also had a similar
29
experience. In our case this was largely facilitated by concessions
offered to indigenous and foreign investors. One major step was the
abolition of the long-term capital gains tax in the 2003-04 Budget,
which for all practical purposes converted Indias equity market into
a tax-free enclave and led to a surge of investments from foreign
institutional investors (FIIs) and others. The surge was more or less
maintained in subsequent (until recent) years. That the exchequer
lost an important source of revenue in the capital gains tax was,
needless to say, nobodys concern.
The enhanced inflow of foreign capital was mostly in the nature
of footloose financial investments in the bourses and in speculative
activities in commodity markets and to some extent also in the real
estates sector. This component, while contributing to the growth
of GDP, stimulated the real productive sectors of the economy to a
very limited extent.
However, the liquidity generated by large inflows of foreign
capital made credit cheaper, which in its turn stimulated industrial
growth in at least three ways. First, it financed purchases of auto-
mobiles and triggered an automobile boom, further facilitated by
expansion of highways and expressways. Second, it financed a boom
in investment in housing and real estate, thereby promoting the
production of construction materials and generating large number
of (casual) jobs. Third, people in upper income brackets were get-
ting rich quicker, for many of them effective income tax rates were
falling, and happy with the opportunity to purchase large varieties
of imported and indigenous consumer durables, apartments, etc.
with borrowed money, they were on a spending spree, contributing
to the expansion in demand for lifestyle products. All these were
reflected in a rapid rise in the share of personal loans in total bank
credit. Expansion in debt-financed consumption and investment was
thus an important proximate cause behind GDP growth.
A second factor might be located in export growth in certain
segments like software, petrochemicals, metals, gems and jewellery
etc. Much of the export boost came from extraneous causes, i.e.,
from favourable changes in world market conditions not related to
Indias economic performance. For example, the growth in iron and
steel industry including the highly polluting sponge iron segment
and consequently, also in coal and iron ore extraction, was large-
30
ly induced by a surge in global demands caused by, inter alia, the
construction boom in China in preparation for the Beijing Olympics.
To an extent the growth in exports resulted also from better
competitiveness: according to the Global Competitiveness Report
2005-06 prepared by the World Economic Forum, India moved
from the 55th Place in the world in 2004 to the 50th the next year in
the Growth Competitiveness Index. This was particularly true of
software exports, which grew from less than $1 billion in FY 1996 to
nearly $23 billion in FY 2005 and more or less maintained the growth
until recently. This has been the main driver behind the sharp rise
in services exports as a whole, where Indias comfortable position
as a net exporter helped substantially to reduce the big and growing
negative balance in merchandise trade.
Among the comparative advantages that helped the growth of
Indian enterprises in the sectors mentioned above, the foremost was
certainly the low-cost human resources: not only cheap labour but
also and in some cases like pharmaceuticals, software and IT-en-
abled services (ITeS) this is considered more important in technical
and managerial skill at half to one-fourth cost relative to what needs
to be incurred in the West. Another advantage is that India boasts the
worlds second largest (after the US) English-educated population
(this advantage, however, may not last long because the Chinese
are rapidly catching up). At the level of infrastructure, however,
India remains miles behind China and this is acknowledged to be
the main bottleneck to growth. On the other hand, other developing
nations too are entering the lucrative off-shoring market. So Indias
comparative advantage will be sustained only until such time as
other cheap-labour countries can create a labour force with similar
levels of skills.
Another important contributor to growth was the large re-
mittances sent by Indians working abroad particularly the large
number of manual workers who send home the lions share of their
incomes. The value of rupee was then appreciating against foreign
currencies, so every dollar sent to India was converted into a larger
amount of Indian money. This money, earned abroad and spent in
India, caters to the growth of the internal market while a fraction is
invested in small-scale undertakings and provides a healthy boost
to the employment-generating informal sector; at the same time it
31
helps strengthen our foreign exchange position. However, with the
onset of global recession this source partially dried up, and so did
income from software and ITeS (information technology enabled
services) exports.10
Among other stimuli, an important one was the extraordinary
profit bonanza made available to big corporates in the shape of
huge concessions doled out by the state. This led to a sharp rise in
investment in certain branches of industry and services. For a few
years the satisfactory growth rate continued without BOP headaches
because, in addition to high export earnings and remittances, there
was more than enough inflow of foreign capital. The other problem
inflation was very much there, but was thought to be within
tolerable limits. One reason was that the strong rupee helped keep
the imported oil bill and other import costs in check.
The unprecedented growth rate, however, did not light up the
lives of those who with their labour made this possible.

Under the Pedestal, Its Pitch Dark

Under capitalism growth is never, it cannot be, egalitarian. But
in the neoliberal phase remarkable gains for capitalists and the rural
rich have come only at the cost of extreme losses for the labouring
people. In addition to the well-known cases of large-scale eviction
for industrialisation and other forms of corporate plunder, the nor-
mal process of capitalist exploitation is intensified in several ways.
While extraction of relative surplus value is enhanced by introduc-
ing latest high-speed plant and machinery, effective working hours
are extended by various means for example by cutting down and
strictly monitoring recess periods available to workers to squeeze
more of absolute surplus value out of the workers toil. Secondly,
casual/contract labour is extensively used even for permanent jobs
to reduce the wage bill. Though illegal, this is easily done thanks
to the existence of a large and growing pool of industrial reserve
army, which also serves to depress the general wage level. Thirdly,
pay commissions and bipartite/tripartite wage agreements are be-
ing increasingly delayed, subverted and even scuttled to erode real
wages or keep them stagnant.
32
 What is the net outcome of all these? Writes C.P. Chandrasekhar
in the article The Roaring 2000s (The Hindu, 10 May 2012):
Since the early 1990s, when liberalisation opened the doors
to investment and permitted much freer import of technology and
equipment from abroad, productivity in organised manufacturing
has been almost continuously rising. Net value added (or the excess
of output values over input costs and depreciation) per employed
worker measured in constant 2004-05 prices rose from a little over
Rs. 1 lakh to more than Rs. 5 lakh [between early 1980s and 2010 A
Sen]. That is, productivity as measured by net product per worker
adjusted for inflation registered a close to five-fold increase over this
30-year period. And more than three-fourths of that increase came
after the early 1990s.
[However,] the benefit of that productivity increase did not
accrue to workers. The average real wage paid per worker em-
ployed in the organised sector, calculated by adjusting for inflation
as measured by the Consumer Price Index for Industrial Workers
[CPI(IW) with 1982 as base], rose from Rs. 8467 a year in 1981-82 to
Rs. 10777 in 1989-90 and then fluctuated around that level till 2009-
10. The net result of this stagnancy in real wages after liberalisation
is that the share of the wage bill in net value added or net product
which stood at more than 30 per cent through the 1980s, declined
subsequently and fell to 11.6 per cent or close to a third of its 1980s
level by 2009-10.
A corollary of the decline in the share of wages in net value
added was of course a rise in the share of profits. [T]he years
after 2001-02 saw the ratio of profit to net value added soar, from
just 24.2 per cent to a peak of 61.8 per cent in 2007-08. These were
indeed the roaring 2000s!
It is thus a highly paradoxical success story with a virulent
anti-poor bias that we witnessed in our country all along the post-re-
form years. And now it is clear that this has adversely affected growth
itself in the longer run. A good many economists (not necessarily
Marxist or post/neo-Keynesian) have held inequality as one of the
major causes behind the crisis and recession in the West. In Europe,
the income shift towards the upper classes led to a dampening of
aggregate demand, while in the US the same trend thanks to the
American way of life and the policy of debt-driven growth was
33
>>In 2004-2006, after more than a decade of economic
reforms and at a time when the economy was growing
fast, per capita net availability of foodgrains was 7.8 per
cent lower than in 1994-1996. Indeed it was lower than
in 1954-1956. [Economic Survey 2007-08]

>>While the number of dollar millionaires and billionaires

was growing at a rate that was among the fastest in the
world, as of 2004-05 a total of 836 million people (77%
of Indias total population) had an income below Rs.20 a
day. This was revealed in the 2007 report of the National
Commission for Enterprises in the Unorganised Sector
(NCEUS), better known as the Arjun Sengupta Commis-
sion. Four sections made up this 77%: the extremely
poor, the poor, the marginal and the vulnerable. Even
the so-called middle income group which constituted
19.3% of the population had an average monthly expen-
diture of Rs 1098 per capita, or less than Rs 4400 only for
a family of four.

>>The situation did not improve in the second half of 2000s.

Even today, India lags behind neighbouring China, Pa-
kistan and Sri Lanka in reducing hunger level, says the
2012 Global Hunger Index (GHI) released by US-based
International Food Policy and Research Institute. It is
ranked 65th out of 79 countries, behind China (at 2nd
place) Pakistan (at 57th) and Sri Lanka (at 37th).

>>According to the United Nations Human Development

Report 2011, India ranks 134 out of 187 countries on
UNDP's Human Development Index. As Dr. Amartya
Sen pointed out at the Kolkata Literary Festival in early
February 2013, half of Indian households do not have
toilets and half of Indias children are malnourished. In-
dia is the only country in the world, he added, that is
trying to have a health transition on the basis of a private
healthcare that does not exist. Between 1999 and 2011,

34
 Indias Gender Inequality Index has worsened from
0.533 to 0.617 and the country now ranks 129 out of 146
countries, behind Pakistan, Bangladesh and Rwanda.
What is most atrocious is the fact that this deterioration
has taken place during years of high growth thus prov-
ing beyond doubt the anti-poor nature of the growth
trajectory itself.11

>>The National Crime Records Bureau (NCRB) figures

across 18 years for which data exist show that at least
2,84,694 Indian farmers have taken their lives since 1995.
(This is a gross underestimate because it accepts the zero
or near-zero figures declared by Chhattisgarh and West
Bengal in recent years). Divide that 18 years into two
halves and the trend is dismal. India saw 1,38,321 farm
suicides between 1995 and 2003 at an annual average of
15,369. For 2004-12, the number is 1,46,373, at a much
higher annual average of 16,264. Farm suicides rose
sharply by almost 450 in Maharashtra in 2012 to touch
3,786. Andhra Pradesh also logged 2,572 farm suicides in
2012. That is 366 higher than the previous years figure.
Kerala saw 1,081 such farm deaths, a steep increase of
251 over its 2011 number of 1,830. Uttar Pradesh saw 745
farm suicides up by 100 over its 2011 figure.

>>The scenario appears all the more gloomy once we take

into consideration the well-known facts about shameful
levels of malnutrition among women and children, high
incidence of maternal and baby death, the sad plight of
minority communities and dalits, adivasis, hill people
and the like. Moreover, the growth pattern takes abso-
lutely no care of the environment (India ranks 125 among
132 countries on Yale University's Environmental Per-
formance Index, behind the likes of Pakistan, Moldova
and Kyrgyzstan).

35
accompanied by an alarming fall in savings and increasing indebted-
ness. In Europe economic slowdown resulted directly from a fall in
demand and that earlier than in the US. In the latter case, recession,
which was artificially postponed through asset bubbles for a period,
came via a sudden and acute financial crisis caused by credit and
deficit explosion. In both instances, reduced purchasing power of
the people was a fundamental reason for recession. In our country
the great relative decline in the purchasing power of the working
class, as enumerated by C P Chandrasekhar (see above), has had a
long term recessionary effect comparable to that in Europe.

Lopsided and Unsustainable Growth

The Indian growth pattern is such that it aggravates existing
disparities not only across classes but also in terms of economic sec-
tors and geographic regions. The outcome is that we have a highly
asymmetrical economy that is large in size but strange in shape,
as veteran Marxist scholar Perry Anderson puts it:
The country now occupies a prominent place in every prospec-
tus of BRIC powers, where the Indian economy is the second largest
in size, though in many ways strange in shape. Manufacturing is
not its pile-driver. Services account for over half of GDP, in a soci-
ety where agriculture accounts for more than half the labour-force,
yet less than a fifth of GDP. Over 90% of total employment is in
the informal sector, a mere six or 8 percent in the formal sector, of
which two-thirds are to be found in government jobs of one kind
or another. In India cultivable land is forty percent more abundant
than in China, but on average agricultural yields are fifty percent
lower. The population is younger and growing faster than in China,
but the demographic dividend is not being cashed: 14 million new
entrants into the labor force each year, just 5 million jobs are being
created.11-A The greatest economic success of the past 20 years has
been achieved in IT, where firms of global impact have emerged. But
its employment effect is nugatory: perhaps 2% of the labor force. Even
in high-technology industries, average labor productivity appears
to be little more than a third of Chinese levels.
Nonetheless, growth averaged some 7.7 percent in the first de-
cade of this century, with savings rising to 36 percent of GDP double
36
the respective rates of Brazil. But compared to China, with roughly
the same size of population and similar starting-points in the 50s,
India scarcely shines, as Pranab Bardhan has shown in his masterly
analytic survey of the two countries, Awakening Giants, Feet of Clay.11-B
Per capita income in India is about a quarter of that in China, and
inequality is significantly higher even than in the notoriously pola-
rised PRC. India may have fewer billionaires than China, but they
are also richer, and their share of national wealth far greater: just
66 resident billionaires control assets worth more than a fifth of the
countrys GDP. Capital at large is three times more concentrated
than in the United States.12
The urban-rural disparity has also aggravated. The NSSO in
its 66th round of quinquennial survey for monthly household ex-
penditure, released in July 2011, showed that for the year 2009-10,
average rural spending was Rs. 1,053 and urban spending was Rs.
1984. The new survey when compared with a similar survey made
in 2004-05 showed that the average monthly expenditure in urban
India increased by Rs. 832 as compared to just Rs. 492 in rural India.
The latest survey also revealed widened expenditure disparity
between the richest and the poorest, especially in urban India. In
urban areas, the difference in monthly expenditure between the
richest 10% and the poorest 10% increased from 4.8 times in 2004-05
to 9.8 times in 2009-10. Rural India witnessed a lesser hike in this
expenditure difference from 3.2 times in 2004-05 it rose to 5.6 times
in 2009-10.
The economic growth achieved in our country is indeed lopsided
and distorted also in the sense that it deviates from the normal course
of capitalist development where abolition of feudal/semi-feudal
property relations not only improve productivity but also greatly
enhance the purchasing power of agriculturists, thus expanding the
home market for manufactured goods. In this way, industry gets
the much-needed demand boost, pulling up mining, transport and
other sectors and absorbing labour released from agriculture. An
agrarian society evolves into an industrialised country, with the lions
share of GDP coming from industries, and creates a solid base for
the third phase where services sector becomes the principal growth
engine. But in our country the middle stage of industrial predomi-
nance was never reached (largely on account of continuance of the
37
semi-feudal fetters on productive forces and the stagnant internal
market for manufactured goods) before the services sector became
the fastest growing one thanks mainly to the extraneous stimuli of
business process outsourcing in the West. Thus, the burgeoning
services sector, certain high-tech capital intensive industries, a few
extractive industries and real estates and construction happen to be
the more important areas that have witnessed robust growth, even
as agriculture and labour-intensive old industries like jute textiles
and engineering tend to stagnate and decline. After 20 years of re-
structuring, agriculture, industry and services contributed 14.62%,
20.16% and 65.22% respectively13 even as nearly 60% of the workforce
continues to be engaged in agriculture and allied sectors (forestry,
fishing, logging etc.).
It is crucial to remember that since the industrial revolution,
no country has become a major economy without becoming an in-
dustrial power; it is very doubtful if India can prove itself the sole
exception in the longer run. As of today, the relative weight of the
services sector vis--vis industries is much greater in India than in
China and this is certainly not a sign of good health.
India now ranks very high in the global production of many
minerals that it produces not for its own use but increasingly for
exports. For instance, in 1995-96, only 1.4% of the bauxite produced
was exported; by 2007-08 this figure had shot up to 47%.
Disproportionate expansion of the services sector creates a false
impression of development without actually improving the quality
of life for the vast majority. Even as the basic material needs of the
working people are not met, the country is flooded with various
types of services leisure, entertainment, tourism, a greater variety
of shopping malls and restaurants, and financial services (e.g., spe-
cialised/personalised banking) to cater to all such needs. Expendi-
ture on these items enters GDP calculations and creates a statistical
illusion of India Shining.
Similarly, the growth process has bypassed the most backward
states and regions and has been concentrated in a few already de-
veloped states and upcoming regions (such as the Gurgaon-Manesar
industrial belt).
Another basic problem with the present growth model is that,
like the so-called green revolution, it depends on and caters to a

38
very thin layer of population: the rich and upwardly mobile urban
and rural middle classes. The other constituency the growth model
relies on happens to be a considerable foreign clientele (for exam-
ple, the BPO sector fully and the software sector mostly depend on
overseas demands). By excluding the bulk of the population this
growth model sets an inherent limit to its sustainability, which has
now been crossed.

From Bubble Burst to Recovery to Stagflation

For all these shortcomings, India did experience, as we saw
above, a significant growth rate thanks mainly to a tidal wave of
footloose financial capital attracted by the vast Indian market and
the lucrative concessions offered by the Indian state. When that
wave suddenly stopped in 2008, naturally the Indian economy too
received a big jolt. The shock came most conspicuously in the shape
of millions losing their jobs in garments, footwear and leather and
other areas as exports started falling rapidly. In 2008 itself and in the
textile sector alone, some 7 lakh workers majority of them women
were rendered unemployed.
For a more detailed, stroke by stroke analysis of the progression
of the recent crisis, we quote rather extensively from an ICRIER
(Indian Council for Research on International Economic Relations)
Working Paper (No. 241, published in October 2009) titled The State
of the Indian Economy 2009-10:
The global crisis got transmitted to India in January 2008 with
the beginning of a massive withdrawal of FII investments from India
and the consequent crash of the equity market (Stage 1). There
had been a net FII disinvestment of US$13.3 billion from January
2008 to February 2009 (14 months) in contrast to a net investment
of US$17.7 billion during 2007 (12 months). This was followed by a
massive slowdown in ECBs by Indias companies, trade credit and
banking inflows (Stage 2) from April 2008. Short-term trade finance
and bank borrowings from abroad swung to outflows of US$9.5
billion and US$11.4 billion respectively in the second half of 2008-09.
The crisis struck the foreign exchange markets by May 2008 and the
rupee fell by about 20 per cent from May to November 2008 (Stage
3). The Reserve Bank of India intervened heavily to support the
39
rupee by selling dollars, leading to some depletion of the stock of
reserves. By mid-September 2008, the crisis gripped Indias money
market (Stage 4). The drying up of funds in the foreign credit markets
led to a virtual cessation of ECBs for India, including the access to
short-term trade finance. The collapse of the stock market ruled out
the possibility of companies raising funds from the domestic stock
market. Indian banks also lost access to funds from abroad. All
these put heavy pressure on domestic banks, leading to a liquidity
crisis from mid-September to end-October 2008.
From September 2008, the trade sector collapsed (Stage 5). In the
second half of 2008-09, merchandise exports declined by 18 per cent
against a growth of 35 per cent in the first half and imports fell by 11
per cent against a growth of 45 per cent in the first half. The growth
in software exports dropped to less than 4 per cent in the second
half of 2008-09 (38 per cent growth in the first half) and remittances
declined in absolute terms by about 20 per cent in the second half
(growth of 41 per cent in the first half of 2008-09).
In the next stage (Stage 6), the crisis spread to the domestic credit
market. The real economy deteriorated from September 2008, shown
first by the sharp fall in export growth to 10 per cent in that month
from about 35 per cent during April-August 2008, and negative
growth thereafter; virtually negligible or negative growth in indus-
trial output from October 2008; and negative growth in central tax
revenue collection, also from October 2008. Business and consumer
confidence began to ebb leading to a decline in overall demand.
By November 2008, the situation had fundamentally transformed.
Expansion of bank finance to the commercial sector slumped to
Rs.609 billion during the four-month period, November 2008 to Feb-
ruary 2009, just about a quarter in comparison with the expansion
of Rs.2,362 billion during the same period a year ago . This was
primarily due to a sharp fall in demand for funds as investment and
consumption dropped. It was also partly due to banks becoming
extremely risk averse with the perception of default rising consid-
erably.
What did the Government of India and the RBI do? The Working
Paper continues:
The major policy response to the crisis came in the form of loos-
ening monetary policy and administering fiscal stimulus packages.
40
There were a few other measures like the relaxation of ECB rules,
raising the cap of FII investment in debt etc.
Monetary Measures
Through successive steps, the RBI brought down the cash
reserve ratio (CRR) from 9 to 5 per cent, the statutory liquidity ratio
(SLR) from 25 to 24 per cent, the repo rate from 9 to 4.75 per cent
and reverse repo rate14 from 6 to 3.25 per cent.
The RBI opened a special window for banks to lend to mutual
funds, non-banking financial companies (NBFCs) and housing fi-
nance companies. The central bank also opened refinance facilities
for banks, the Small Industrial Development Bank of India (SIDBI),
the National Housing Bank (NHB), and the EXIM Bank besides in-
troducing a liquidity facility for NBFCs through a special purpose
vehicle (SPV), and increasing export credit refinance.
Fiscal Stimulus Packages
The central government announced three successive fiscal stim-
ulus packages: one in early December 2008, the second one in early
2009 and the last one in early March 2009. These included an across-
the-board central excise duty reduction by 4 percentage points;
additional plan spending of Rs.200 billion; additional borrowing by
state governments of Rs.300 billion for plan expenditure; assistance
to certain export industries in the form of interest subsidy on export
finance, refund of excise duties/central sales tax, and other export
incentives; and a 2 percentage-point reduction in central excise duties
and service tax. The total fiscal burden for these packages amounted
to 1.8 per cent of GDP.
Impact on the Economy
The growth in GDP dropped to 5.8 per cent (year-on-year) during
the second half of 2008-09 from 7.8 per cent in the first half. The
lower GDP growth can be attributed partly to the decline in private
consumption growth to just 2.5 per cent in the second half of 2008-09
from an average consumption growth of 8.5 per cent in the whole
of 2007-08. Private consumption growth dropped further to 1.6 per
cent in the first quarter of 2009-10. The growth in fixed investment
declined to 5.7 per cent in the second half of 2008-09 from 10.9 per
cent in the first half and an average of 12.9 per cent in 2007-08. The
growth in fixed investment dropped further to 4.2 per cent in the
first quarter of 2009-10. Government consumption growth, on the

41
other hand, rose steeply to 35.9 per cent in the second half of 2008-
09 from just 0.9 per cent in the first half and 7.4 per cent in 2007-08.
The sharp rise in government consumption growth cushioned the drop in
growth of other components of aggregate demand and prevented a larger
fall in GDP growth in the second half of 2008-09. [Emphasis added]
The aforesaid package of monetary and fiscal stimuli drawn
up largely on the lines of measures adopted in the US helped
promote credit-financed consumption (first in the public sector and
then to some extent also in the private sector) and infrastructural
investment in PPP model (in many cases without proper cost-ben-
efit assessment, as we shall see in the next chapter) while financial
inflow from abroad was restored rather quickly thanks to the huge
infusion of liquidity through stimulus packages introduced in the
US and other advanced economies. These and some other factors
combined to bring the GDP growth back to 8% in 2009 and then to
9.9% in 2010-11.15 This was a V-shaped recovery, which occurred in
some other emerging economies also.
Such a fortuitous conjecture, however, was destined to be short-
lived. Before long, high inflation struck again, with food price infla-
tion being particularly high in some periods. The main causes were
rising import costs (increasingly caused by, inter alia, the declining
value of rupee), growing fiscal deficit of the wrong kind (i.e., spurred
not so much by state spending on productive, employment-gener-
ating sectors/activities as by wasteful expenditure and revenue
foregone and other concessions to the rich), cuts in subsidies and
the neoliberal practice of leaving even administered prices to the
vagaries of markets.
In an attempt to arrest inflation, the RBI raised interest rates
repeatedly. This dampened debt-financed private consumption as
well as investment, adversely affecting growth. Capitalists and their
spokesperson Finance Minister repeatedly demanded, in increasingly
aggressive tones, that the interest rates must be lowered in order to
regenerate growth. But stubborn and often rising inflation would
not permit the countrys central bank to abandon its responsibility of
controlling price levels. So the Chidambaram-Subbarao clash contin-
ued, until a rapprochement was arrived at in January-February 2013,
with the RBI agreeing to make credit cheaper by moderately lowering
interest rates and the Finance Ministry taking fiscal conservatism to

42
the extreme through drastic reductions in public expenditure both in
actual terms in the current fiscal year as well as in budget provisions
for the next year (see below).
The reconciliation was only to be expected because both the
finance ministry and the countrys central bank work under the in-
tellectual hegemony of international finance capital, although their
immediate priorities and compulsions may differ and give rise to
occasional frictions independently of who happens to be RBI gov-
ernor. On this basis was started a new round of crisis management.

CFMNZhvwQ

43
44
 IV

A Last-Ditch Effort:
Seeking Salvation in Further
Deregulation

With the first signs of deceleration of growth in India since

2009-10, economic and political agencies of high finance were back
at their old game: pressuring New Delhi for more concessions and
further opening up of the economy. The government was criticised
for policy paralysis, the PM was personally attacked and the
credit rating agencies threatened to and actually did downgrade
Indias creditworthiness. As usual, Indian big business and corpo-
rate media were singing the same tune. To be sure, the government
was always willing to fall in line but the sheer unpopularity of the
proposed reform measures and calculated opposition on the part
even of parties (like the BJP) which are actually in favour of such
measures and even some constituents of the UPA, held back its
hand. But not for long. After some dillydallying, towards the end
of 2012 the Congress decided to go on the offensive once again from
the side of big capital. It was expressed in several forms: a booster
dose of reform, budget 2013 and an unending series of anti-people,
pro-corporate policy decisions. Instantaneously, the avalanche of
admonitions turned into a spring tide of profuse praise. The lion
roars again, it was announced in praise of Manmohan Singh. For
ordinary people, harder days were in the pipeline.
45
 Another Tranche of Neoliberal Reforms
In September 2012, at one go price of diesel was hiked by Rs.5 a
litre, subsidy for LPG cylinders halved, sectors like multi-branded
retail, civil aviation and broadcasting were opened up for foreign
investment and shares of several profit-making public sector units
were put up for sale.
Among these, the one that attracted the peoples ire immediate-
ly was the severe curtailment of subsidy on LPG cylinders and the
steepest-ever hike in the price of diesel. The latter, even the govern-
ment could not deny, was sure to result in a hike in transport costs
which, in turn, would impact on food prices. The governments
claim that the hikes were justified in the light of losses suffered by
oil companies was exposed as a shameless subterfuge on at least two
counts. One, all the oil and gas companies had recorded substantial
net profits. Secondly, it was pointed out, the government has to pay
huge subsidies on diesel only because it collects a still larger amount in
duties; if it decided to raise this amount by taxing the rich and im-
proving revenue collection, no subsidies would have been required!
In addition to straightforward withdrawal of subsidies, the
government has also devised a set of indirect methods of doing
the same. The arbitrarily determined, ridiculously low poverty line
has already disentitled a huge number of poor people from bare
necessities like low-cost food and shelter.16 The new scheme of cash
transfer of subsidies via Aadhar Cards will ensure further exclu-
sion because of various loopholes in the delivery system, e.g., many
would-be beneficiaries not having bank accounts.
The decision that invited the sharpest debate in addition to pro-
tests on the street was the green signal to FDI in multi-brand retail.
The government claimed that this will result in investment in cold
chains and therefore in lower prices by eliminating middlemen;
it was pointed out that in the fruits and vegetables sector, where a
cold chain infrastructure was most needed, data from developing
countries indicated that prices in new supermarkets were generally
higher than in existing retail shops. The officials asserted that existing
retailers will not be harmed. But data from Latin American and South
Asian countries showed a significant decline in the number of small
shops and in the market share of open air vendors consequent upon
46
the entry of foreign retail chains. The Indian Government claimed
that many new jobs will be created when new shopping malls
come up. That this was a pure deception was easy to understand,
because by no stretch of imagination the employment potential of
capital-and-technology-intensive shopping malls can come anywhere
near that of labour-intensive kirana shops.
The policymakers most potent argument was that corporate
retailers would buy directly from farmers and other small producers,
who would get better prices with the elimination of middlemen. This
might seem plausible in the abstract, but not to those who are familiar
with ground realities in our country. Most purchases for corporate
retailers occur through contract farming, which leaves the farmers at
the mercy of the big players. Even otherwise, rarely can small farmers
access the supply chains because the latter insist on arbitrary quality
standards and prices. Furthermore, the powerful retailers can start
with better terms for the producers and, once the old middlemen
are thus elbowed out of competition, use their monopoly positions
to squeeze the unorganised small suppliers in a buyers market.
All these and many other pitfalls have been thoroughly exposed
in a huge and growing number of studies by institutions as well as
individuals in India and abroad.
Finally, the government spoke of various checks and balances
to protect the interests of small producers and retailers. That these
are nothing more than false promises was proved when, for in-
stance, the initial promise that foreign retail chains shall be required
to source at least 30% of products from Indian small and medium
enterprises (SMEs) was summarily waived in the case of Swedish
furniture giant IKEA.
So on and so forth, arguments in favour of FDI have been de-
molished one after the other. Even the Supreme Court accepted a
PIL in January 2013 and asked the Centre to file a response on how
it intends to safeguard interests of small traders. Have you got any
investments or just a political gimmick? Has the FDI policy brought
some fruits? it asked the government counsel. However, the court
was not within its powers to rescind the executive decision. The
government had its day. It rolled out the red carpet to retail MNCs
like Walmart and Tesco, even as the latter were facing unprecedent-
47
edly massive protest in the West, in Los Angeles and New York for
example.
Less protested on the street but strongly criticised in informed
circles is the decision to open up pension funds and banking to
global finance capital. Following the passage of the Insurance Law
(Amendment) Bill, 2008 and the Banking Laws (Amendment) Bill,
2011, which provided a new momentum to the privatisation offen-
sive, now there is also the Pension Fund Regulatory & Development
Authority (PFRDA) Bill, 2011, which seeks to allow 49% FDI in the
pension-PF sector. These moves will give free hand to the fund man-
agers to play with billions of rupees of hard-earned money of the
Indian working people to reap huge profits through share market
speculations and by other means.
That the RBI is in full concurrence with the Government of In-
dia on the question of further opening up our financial sector was
made clear by R Rajan late last year in Washington. Forgetful of the
catastrophic collapse of American banks and financial institutions
only a few years ago, he issued an open invitation to the banking
giants of America to gobble up Indian banks. That is going to be
a big big opening because one could even contemplate taking over
Indian banks, small Indian banks and so on if you adopt a wholly
owned subsidiaries structure we will allow you near national
treatment, he told a gathering of representatives of the American
financial establishment.

2013-14 Budget Blues

The country has no choice but to invite foreign investment, said
P Chidambaram in his budget speech. An obvious understatement,
it meant that the government was prepared go to any length to try
and revive capital inflows at any cost. This was the main thrust of the
budget proposals, and remains the cornerstone of the governments
economic thinking as a whole.
And what do suppliers of foreign finance, particularly their most
vocal representatives, the credit rating agencies (CRAs)17, demand
as the foremost condition for accepting this country as a safe market
for investment? That fiscal and current account deficits, the former in
particular, must be brought down to the minimum if not eliminated.

48
So suggested the Kelkar committee too. In the budget and in the
set of decisions that preceded and followed it, the FM concentrated
single-mindedly on fulfilling this wish list and shamelessly begged
the CRAs to upgrade Indias rating, albeit in vain.
It was the railway budget 2013-14 that anticipated the austerity
thrust to be fully manifested in the general budget. Not only were
freight, fare and sundry other charges (such as cancellation charges
for reserved berths) steeply hiked, steps were taken to deregulate
fares and freights by linking these to variable fuel prices, which
effectively meant that with every increase in the price of diesel or
electric power the railway fares and freights will automatically rise.
As for the general budget, P Chidambaram earned kudos from
vocal proponents of fiscal orthodoxy by (a) restricting fiscal deficit
for 2012-13 approximately at the budget estimate (BE) i.e., 5.2% of
GDP despite a slowdown in revenue growth and (b) promising to
further reduce the deficit to 4.8% of GDP in 2013-14.
The first he achieved by drastically reducing both revenue
and capital expenditure in the financial year just ended: total Plan
expenditure being Rs.90,000 crore less than the budgeted amount.
Almost all sectors from agriculture and rural development to social
services have experienced the cut. The much-touted MGNREGA
gets Rs.33,000 crore, the same as in the previous year. In both school
education and health, allocations have been increased merely by 8%
compared to the previous years budget, which means practically
zero increase when inflation is taken into account. As per the revised
estimate 2012-13, total capital expenditure is a drastic 18% less than
budgeted while central assistance to states is also 14% less than bud-
geted. In fact such drastic cuts in expenditure, which depress effective
demand and slow down capital formation, are partly responsible for
the deceleration we are already experiencing.
As for the second the promise to further reduce the fiscal
deficit the FM finds himself in a tight corner. Data released by the
government on the last day of 2013 showed that the fiscal deficit in
the April-November period was already Rs.5.09 trillion, against a
budgeted target of Rs.5.42 trillion for the whole year to next 31 March.
It was obviously not possible to keep the deficit within 0.33 trillion
during the remaining four months. The problem, as usual, lay in
expenditure exceeding the budget and revenue collections falling
49
below estimates in a backdrop of slowdown. Given the governments
fiscal orthodoxy, the upshot in all probability will be further cuts in
state spending. In that case the economic benefits of a healthy state
spending promoting infrastructure, creating jobs and thereby
augmenting domestic demand when export markets are shrinking,
improving the conditions of life and therefore productivity of the
masses will be lost. With slower growth of GDP, tax revenue will
shrink further, making it more difficult to meet targets of fiscal con-
solidation. The entire exercise will prove counter-productive, just as
the austerity programmes in countries like Greece and Spain have.
The budget was not shorn of tokenism either. A case in point
is the surcharge (one-time, one-year levies) on individuals with an
annual taxable income of more than Rs 1 crore and on domestic and
foreign companies with taxable incomes above a certain limit. The
fact of the matter, however, is that this burden is more than offset
by continuing discrimination in favour of property income (no tax on
dividends, no long-term capital gains taxation of share transactions,
and no inheritance tax).

Kowtowing Before Foreign Capital

Among the steps taken to keep foreign investors in humour, the
most shameless was the backtracking on the General Anti-Avoidance
Rules (GAAR). Introduced only the previous year (2012) by the then
Finance Minister Pranab Mukherjee, its purpose was to prevent the
misuse of law to legally avoid (as opposed to illegally evade) tax
payment by foreign investors. But this thoroughly just and rational
decision was soon put on hold, first for one year when Mukherjee was
kicked up the ladder and Manmohan Singh temporarily assumed
charge of the finance portfolio, and then, in January 2013, for another
two years. However, the very mention of GAAR on budget day gen-
erated much adverse reaction on the part of investors and the finance
ministry had to promptly clarify that all that was required of foreign
institutional investors was tax residency certificates to continue to
enable them to avoid paying tax on the income they earn on the
investments they have brought in from Mauritius. Additionally, it
was clarified that GAAR provisions will apply only on investments
made after August 30, 2010 and that too only above a threshold of
50
Rs.3 crore in tax benefits. All these assurances were necessary, it was
said, for restoring and sustaining the confidence of foreign investors
(and this was left unsaid also of Indian investors who prefer the
Mauritius route of round-tripping to avoid tax).
Another symbolic gesture of appeasement was to be seen in the
volte face on the Vodafone tax case. The Vodafone-Hutchison Essar
deal of 2007 involved transfer of shares of a foreign company (Hong
Kong-based Hutchison) on Cayman Islands, that is outside India,
which indirectly held the shares of an Indian company (Hutchi-
son-Essar, since renamed Vodafone Essar and currently known as
Vodafone India). In one of Indias biggest tax controversies, with
the Tax Authority demanding approximately $2.5 billion in capital
gains tax from Vodafone and additional penalties in a similar range,
the Supreme Court held in January 2012 that indirect transfer would
not be taxable in India. The SC also dismissed the review petition
filed by the Union of India and the Tax Authority in February 2012.
The Supreme Court directed the tax department to return the Rs.
2,500 crore deposited by Vodafone in compliance with an interim
order. The apex Courts order was seen as a victory for Vodafone. In
response, the then Finance Minister Pranab Mukherjee amended the
Income-Tax Act, 1961 with retrospective effect to undo the Supreme
Courts judgement.
Following this, international and domestic investors began to
raise concerns about investing in India. The government then ap-
pointed a committee under tax expert Parthasarthi Shome to look
into the issue. The Shome committee promptly recommended the
reversal of Mukherjees decision regarding GAAR and withdrawal
of the demand on Vodafone. Both recommendations were accepted
in principle and conciliation with the MNC arrived at, even as P
Chidambaram kept visiting the US and other Western countries beg-
ging for foreign investment and meeting foreign investors in Delhi
Moreover, as if to flood the country with all types of foreign
funds, the government further eased ECB rules also. ECB limit for
NBFCs, including IFCs (Infrastructure Finance Companies) under
the automatic route has been increased from 50 % to 75 % of their
owned funds, including the outstanding ECBs. The limit for auto-
matic approval has also been increased from $100 million to $200
million for the services sector (hospitals, tourism, etc.) and from $5
51
million to $10 million for non-government organisations and micro-
finance institutions.
But this is a short-sighted policy that directly contradicts RBIs
stated policy stance of discouraging debt flows. It will further en-
hance our external debt and interest burden, the ill effects of which
we have already discussed.

Administrative Reforms to Help Corporate Plunder

With the SEZ avenue of corporate loot coming up against pow-
erful mass resistance and the land acquisition legislation getting
delayed, in early 2013 the UPA cabinet took a bypass route that of
administrative reforms aimed at speeding up economic deregulation.
Thus in the name of clearing the obstacles to growth, the govern-
ment set up a pair of high power supra-ministerial bodies mandated
to use authoritarian discretionary powers to sanction industrial/
business projects by overriding principled opposition from official
and non-official bodies. One is the Foreign Investment Promotion
Board (FIPB) and the other, the National Investment Board (NIB).
The latter was soon renamed as Cabinet Committee on Investment
(CCI) and placed under the chairmanship of the Prime Minister, so
as to make it all-powerful.
In whose interest were these bodies founded? Facts speak for
themselves.
It was at the instance of the FIPB that, as already noted, IKEA
was allowed to sidetrack the condition of accessing at least 30% of
products from Indian SMEs. At the time of founding NIB/CCI, the
finance ministry observed that it was needed because green clear-
ances were holding up the countrys infrastructure development and
growth. This was strongly contested by the Ministry of Environment
and Forests (MoEF) and others like the Delhi-based Centre for Science
and Environment (CSE) and the Bengaluru-based Environment Sup-
port Group (ESG). The board is patently undemocratic, anti-federal,
counter-intuitive and an extremely dangerous proposal and it mil-
itates against the national interest, compromises good governance,
and imperils our cherished constitutional legacy, said the coordina-
tor of ESG. But the FM had his way and the CCI was set up as a fast
track supreme arbiter working for industrialists. In a matter of two
52
months, that is by March 2013, it gave the nod to projects worth Rs.
74,000 crore, stuck for years due to lack of various clearances. Most
of these projects are in the infrastructure and energy sectors (mainly
coal, oil, power) and they involve large scale evictions and damage
to the environment. In several cases, objections raised by Ministry of
Defence and Oil Ministry, the Defence Research and Development
Organisation (DRDO)/Indian Air Force (IAF) were overruled. In-
terests of local communities as well as overall environmental and
security concerns were thus sacrificed on the altar of development.
Minister of state Jayanthi Natarajan wrote to Prime Minister
Manmohan Singh expressing concern over setting up of such a
body. She pointed out that the NIB was to set deadlines for granting
clearances which includes environmental clearances, for ultra mega
projects of Rs 1,000 crore and above. The project proponents could
approach NIB if they were aggrieved by the decision of MoEF. But
an ordinary persons right of appeal to the board, if aggrieved by the
project, was not recognised. She noted that her ministry in no way
has ever stalled projects and had granted environmental clearances
to as many as 181 coal mine projects in the 11th Five Year Plan and
alleged that the proposed changes in the environmental clearance
procedure would have far-reaching consequences on the way the
MoEF runs.
The rational position was not acceptable to top industrialists and
therefore the Congress high command; Narendra Modi also raised
the bogey of a Jayanti Tax. Following the partys dismal perfor-
mance in the Assembly elections at the end of 2013, the Congress,
desperate to appease big business and step up investment before the
Lok Sabha polls, removed Natarajan from the cabinet on December
21. Two days later Veerappa Moily, who had already proved his
mettle as Petroleum Minister in the service of the likes of Mukesh
Ambani, was given the additional charge of MoEF.
The environment ministry had, in 2009, made it mandatory to
get the consent of all the gram sabhas whose lands were involved in
projects like roads, transmission lines and pipelines that pass through
several villages and vast forest land, in order to protect the rights
of scheduled tribes and other traditional forest dwellers under the
2006 Forest Rights law. The CCI or Cabinet Committee on Invest-
ment ordered a roll back of this hurdle but Natrajan was willing
53
to follow the law of the land and Supreme Court directives on the
matter. For that crime and for doing her duty she lost her job. After
approving projects (including Posco steel) worth Rs 1.5 lakh crore
in the first three weeks, Moily said in mid-January that in another
month he will clear 55 more projects.

Serving Private Sector with Public Resources

Subsidisation of the corporate sector by the state has assumed
scandalous proportions in recent years. Exemptions handed out to
the corporate sector in annual budgets gives us one straightforward
indication and the amount adds up to more than Rs 5 trillion in the
last eight budgets. As we have noted earlier, the corporate sector is
the biggest recipient and defaulter of loans extended by Indian public
sector banks and despite the gloomy economic scenario banks are
loaning out huge amounts to their corporate clients, the total volume
of highly risky corporate debt running into Rs. 3.6 trillion.
Here is another example. We often hear that thanks to reforms,
the private sector is now playing a big role in infrastructure devel-
opment, which is so crucial for national prosperity. What is kept
secret is the fact that this is just another way of milking the public
cow for earning private profits (and praise). In the aviation sector
for example, a host of private players started operation with much
aplomb and fanfare but almost all of them Kingfisher being only
the most sensational, tip-of-the-iceberg case have since gone into
the red, with burgeoning defaults on the huge loans from (mostly
public sector) banks. An even larger sum of money Rs.2,69,165
crore has been lent to private power projects, many of which, being
neck-deep in trouble, are habitual defaulters. The government on one
hand is trying to bail out these projects with subsidised coal supply
and other concessions and on the other hand making periodical cash
infusions into the banking sector to the tune of Rs.20,157 crore,
12,000 crore and 15,000 crore respectively in FY 2010, 2011 and 2012
so as to maintain the required capital adequacy ratio. Both ways,
it is public resources that the government is arbitrarily siphoning off
to the private sector whether directly or indirectly through (PSBs).
Just as the SBI has been the worst sufferer in the Kingfisher case,
so also in most other instances PSBs had to bear most of the burden.
54
The reason is that the government pressures them into lending to
these high-risk ventures, which private banks generally steer clear
of. This is clearly manifested in available data. During the period
FY 2009-12, bank credit grew at approximately the same rate in
state-owned and private banks: by 19.6% and 19.9% respectively.
But the volume of restructured loan grew at a compound rate of
47.9% in the case of public sector banks, compared to only 8.1% in
the case of Indian private banks. Foreign banks acted even more
prudently during this difficult period. The loans they advanced grew
at a modest 11%, i.e., more than eight percentage points lower than
their Indian counterparts, and they religiously avoided lending to
the risky infrastructure sector. The result was that their restructured
loans decreased by as much as 25.5% during the same period. Clearly,
the worst performance of PSBs on this score is to be attributed not
to their presupposed inefficiency, but to the governments policy
stance of providing all conceivable help to big capital even where
that entails huge losses for the lending banks, i.e., ultimately for the
national exchequer.

Allowing Corporate Encroachment

in the Banking Sector
Going ahead in the same direction, the government has now
conceded big business houses long-standing demand that they be
allowed to set up their own banks. The latter are very happy, for
now they will be able to take easy loans from public deposits. Such
banks can confer undue advantages in lending to their own business
concerns by breaking norms of prudent banking (very low interest,
extra leniency regarding repayment etc.) thereby jeopardising the in-
terests of other shareholders of the bank. That is why Nobel laureate
Joseph Stiglitz said in Mumbai In January 2013 that corporates should
not be allowed to enter the banking space as it has the potential to
create conflict of interests. As one perceptive analyst quipped, the
best way to rob a bank is to own one!
It has been argued that the move would serve to extend banking
services to more people, including those in rural areas. Does past
experience justify such expectations?
55
 When doors were thrown wide open to foreign and domestic
private banks (though not to existing corporate entities) in the 1990s,
the number of scheduled commercial banks first rose but then de-
clined as banks were closed on grounds of non-viability. The share of
rural branches in the total fell from 58 per cent in 1990 to 37 per cent
in 2011. The population cover also worsened: from 13,700 per bank
branch in 1991 to 15,200 in 2001 and close to 16,000 by the end of the
first decade of this century. Moreover, there was a sharp decline in
the share of priority sector advances in total non-food credit: from
40 per cent in 1990 to 33 per cent in 2012. The shares of agriculture
and the small-scale industrial sector came down to 12.2 and 6 per
cent respectively in 2012 from 16.4 and 15.4 in 1990.
It is futile to expect that the new breed of corporate banks would
tread a very different path and serve any useful social purpose. Of
course, the real purpose that of opening yet another channel of
private corporate plunder will certainly be served.
To judge the new decision in perspective, the Indian experience
tells us that public ownership to some extent influences the behaviour
of bank managers trained as public servants not to succumb to the
lure of quick profits, and this helps avoid the US-type banking crisis.
The period since 1993, however, has witnessed a steady retreat from
the dominance of public ownership by means of (a) grant of greater
space for foreign banks (b) grant of licences to new private banks and
(c) considerable dilution of public ownership in the nationalised and
state-owned banks by significantly increasing the share of private
equity ownership. The latest decision allowing corporate entry is
yet another retrograde step in the same direction, one that further
strengthens corporate control on the banking sector and goes directly
against the needs of small business and the small account-holders.

The New Land Grab Legislation

The government never tires of waxing eloquent on its commit-
ment to inclusive growth, but in real life contradicts itself in every
step. The latest example is the land acquisition Act passed last year,
which seeks to satisfy the hunger of big business by dispossessing
the toiling millions.
56
 Deceptively titled The Right to Fair Compensation and Trans-
parency in Land Acquisition, Rehabilitation and Resettlement, the
new Act actually leaves the field open for accelerated and unfettered
transfer of agricultural land without any effective provisions of
compensation or resettlement.
The Act is essentially about the procedure to be generally adopted
exemptions are always allowed as a demonstrable last resort for
acquisition of land by the state. Private purchase of land through
private negotiations is completely outside the ambit of this entire
legislation. And contrary to the text of the 2011 draft, the final ver-
sion does not specify any limit for such privately negotiated private
purchase (read corporate land grab by hook or crook) and leaves it
entirely to the whims and fancies of the appropriate government.
The acquisition of land by the state is legitimized by invoking
public purpose. The new Act has evolved a most flexible definition
of public purpose by virtually including any and every purpose other
than agriculture! Any supposedly strategic purpose is obviously
designated as public purpose and that includes purposes relating to
naval, military, air force, and armed forces of the Union, including
central paramilitary forces or any work vital to national security or
defence of India or State police or safety of the people. And then
all kinds of infrastructure projects, industrial corridors or mining
activities and investment or manufacturing zones designated in
the National Manufacturing Policy, and projects for sports, health
care, and tourism also come within the purview of public purpose.
Private hospitals, private educational institutions and private hotels
are excluded, but public-private partnership projects where the own-
ership of the land continues to vest with the government or private
companies involved in any activity defined as public purpose are
all covered by the Act. In other words, the pursuit of private profit
is also being sanctified as public purpose.
A major grievance against the 1894 Land Acquisition Act con-
cerned the forcible nature of the acquisition where the affected people
had little say. The government claims to have addressed this aspect
and the new Act requires the state to obtain 70% prior consent in the
case of acquisition of land for public-private partnership projects and
80% consent where land is being acquired for a private company.

57
But no prior consent is needed where the state acquires land for its
own use or for Public Sector Undertakings.
Instead of seeking the consent of the affected people, the Act
talks about consulting concerned local bodies and conducting a so-
cial impact assessment study and getting it evaluated by an expert
group. The recommendations of the expert group are however not
mandatory and any government can overrule them provided the
reasons are recorded in writing. Moreover, the requirement of a
social or environmental impact assessment study does not arise if
and when any government invokes the urgency provision relating
to any strategic purpose.
Next comes the question of compensation, rehabilitation and
resettlement. Here again, the question does not arise in cases of
privately negotiated private purchase. A private company attracts
the provisions of compensation, rehabilitation and resettlement only
when it requests the state to acquire some land over and above what
it has already purchased. It has been widely seen that land acquisition
affects a whole lot of people beyond the owners of the concerned land
plots. The new Act recognizes this reality while defining affected
families but leaves out the landless from the ambit of compensation.
Those who suffer displacement are offered something by way of
rehabilitation and resettlement, but landless agricultural labourers
and share-croppers or people engaged in sundry professions whose
livelihood is affected by land acquisition hardly get anything.
Beyond the direct loss of land and livelihood, acquisition of ag-
ricultural land, existing or potential, adversely affects food security.
The new Act has a small section entitled special provision to safe-
guard food security which however offers no concrete safeguard.
Projects that are linear in nature such as those relating to railways,
highways, major district roads, irrigation canals, power lines and the
like are exempted from this provision and recent experience clearly
shows that huge amounts of agricultural land are being diverted in
the name of expressways and corridors. Acquisition of agricultural
land is however not restricted to only such projects of linear nature.
The Act allows acquisition of all kinds of agricultural land including
irrigated and multi-cropped land for any project in public purpose,
and that too, without specifying any limit.

58
 At a time when India needs to increase food production and in-
crease the actual area under cultivation, the state is thus paving the
way for a steady decline in effective availability of agricultural land
thereby pushing the country into a more acute food and agrarian
crisis. What kind of growth can take place on this foundation, and
for whom?

The Elusive Upturn

Now, leaving apart for a moment the question of the desirabil-
ity of the seven sets of measures outlined in this chapter, will they
prove effective in bringing back the high growth rate of yesteryears?
That hardly seems to be the case. Even the big ticket reforms read
new concessions to big capital are in most cases failing to produce
expected results. Thus, last years relaxation of the cap on foreign
investment in almost all sectors was immediately greeted by South
Koreas Posco scrapping its $6 billion project in Karnataka and the
worlds largest steel maker Arcelor-Mittal withdrawing its $12 billion
steel plant project in Orissa. And there is nothing to be surprised
about such setbacks. Given the fragile state of the Indian economy,
it is only to be expected that profiteers from abroad would not show
much interest investing in this country. The actual experience over
the past one year (in the case of FDI in retail for example, where their
response was less than lukewarm) amply proves this.
Similarly, the poor prospects of the economy are prompting
many an Indian businessperson to invest more abroad than in the
home country. Their pragmatic approach was authentically voiced
by noted industrialist and FICCI ex-Vice President Y K Modi at the
76th convention of FICCI held in December 2013. In reply to Rahul
Gandhis appeal for brisk investment he said he would not invest
in India just because she needs it, but only in the interests of his
concern and its shareholders; otherwise he would prefer investing
in other countries.
To take another instance, there is hardly any progress in the
matter of opening corporate banks. Following Value Industries, pro-
moted by Videocons Venugopal Dhoot, Tata Sons has withdrawn its
application for opening a new bank. A few other prominent players

59
like Mahindra Finance have announced they preferred to stay away
from the field.
Clearly, the spell of Manmohanomics is over. What remains, and
is growing profusely, is a pair of its toxic by-products.

CFMNZhvwQ

60
 V

Crony Capitalism and

Mega Scams

As Marx pointed out long ago, The executive of the modern state
is but a committee for managing the common affairs of the whole
bourgeoisie. In other words, business-state or business-politics
nexus is an essential ingredient of capitalist polity. This has been the
case in our country too ever since the Indian state was born.
However, since in a parliamentary system the government also
has to take some care of the voters, a continuous tug of war ensues
between the popular masses and the exploiting rich, with each side
trying to influence and bend state policy in its own favour and the
outcome is determined, within the broad limits of the system, by
the balance of forces between the two sides. In the Indian context,
in proportion as the capitalist class became more powerful econom-
ically, it came to exert ever stronger political influence on successive
governments. This became glaringly visible since 1980s and the more
so since 1990s, when the role of the state was changed from regulator
of the economy to facilitator of investment.
So what is now popularly called business-politics nexus is the
product of a long process of evolution, which has now reached a
stage that needs a new name to adequately describe itself. That term
is crony capitalism or simply cronyism, where crony refers to old
friends or favoured ones to whom undue privileges/concessions/
lucrative posts are offered irrespective of their merits18.
Similarly, we all know that economic scandals or scams cor-
ruption in more general terms are nothing new. What is new is
the incomparably larger scale of corruption today, which is a gift of
neoliberalism. This will be evident if we compare pre-1991 economic
61
scandals with recent ones. Take for example the Bofors scandal. It
involved a mere 64 crore rupees. Even after adjusting for inflation,
the figure would now come to, say, 300 crore rupees. The 2G spec-
trum scam involved Rs. one lakh seventy-six thousand crore! That
is, nearly 600 times the Bofors amount!
Also take a look at the amount of money being illegally siphoned
off our country to Switzerland and other tax havens. According to
a report prepared by the US-based research body Global Financial
Integrity, in the 60 years between 1948 and 2008, more than Rs 20
lakh crore has exited the country in this way. Nearly half of this
drainage occurred in the 1992-2008 period, i.e., in 16 years, while
about a third occurred in just 8 years of the 21st century.
These mind-boggling figures show that the eclipse of the li-
cense-quota-permit raj yesteryears convenient whipping boy for
rampant corruption did not lead to any decline in the menace. On
the contrary, all-pervasive liberalisation, privatisation and globali-
sation have thrown the floodgates of corruption wider open. The 2G
scam, it should be noted, surfaced recently but had its origin long ago
during the booming 2000s. The same is true for most other scandals
that came to light after the deceleration in growth rate started. This
shows that the period of the biggest leap in growth rate was also the
one marked by the biggest explosion in corrupt practices.
So what is new is that the age-old collaboration between politics
and business has now developed into a coalescence of the two in the
crucible of power. The Vadra-DLF deals and the operations of Gad-
karis Purti group of companies give us an idea of the intricate ways
in which political influence is converted into corporate wealth with
impunity and the latter is further used to buy necessary connections.
But it is not the political class alone that is to blame. A whole host
of companies and conglomerates, both old and new, have revelled
in ill-earned profits in all kinds of scams involving, for example,
modernisation of airports, allotment of coal blocks or even purchase
of trucks and coffins for the armed forces. In some cases, such as
the Tatra truck contract, foreign MNCs are involved, while in some
others like the sale of 2G spectrum, companies which took part in
the bidding without the required expertise or capacity, offloaded
majority stakes to foreign players at huge profits. Moreover, a good
62
many big players routinely take capital out of the country by illegal
means like transfer pricing, mis-invoicing and hawala.

Testimony of a Morgan Stanley Chief

Cronyism and scams are to be condemned not just on moral and
political grounds. No less serious are the economic consequences.
This is excellently brought out in the essay The Great Indian Hope
Trick by Ruchir Sharma.19 The author provides us with valuable
insights about the fault lines in Indias apparently successful growth
strategy from the viewpoint of a bourgeois expert. On the strength
of a comparative study of a representative assortment of various
economies, the widely travelled author presents his views in a
straightforward way:
Under the current regime of drift in India, crony capitalism has
become a real worry. Widespread corruption is an old problem, but
the situation has now reached a stage where the decisive factor in
any business deal is the right government connection. When I made
this observation in a September 2010 Newsweek International cover
story titled Indias Fatal Flaw, I was greeted as a party spoiler. Top
government officials told me that such cronyism is just a normal
step in development, citing the example of the robber barons of
nineteenth-century America. (See how Sharma refutes this argument
at the end of these excerpts A Sen)
Since 2010, the issue has exploded in a series of high-profile
scandals Indias place on Transparency Internationals annual
survey of the most and least corrupt nations fell to number 88 out
of 178 nations in 2010 down from number 74 in 2007. India is ap-
proaching the point that Latin America and parts of East Asia hit in
the 1990s, when a backlash started to form against economic reforms
because any opening up of the economy was seen to favour just a
select few. The first stirrings of the middle class discontent appeared
in 2011 as many urban Indians started to rally behind social activist
Anna Hazare.
Is there a link between the crony-scam double menace and exces-
sive concentration of wealth? Yes there is, says Sharma, and draws
attention to certain special features and trends of Indian capitalism,

63
notably its disproportionately top-heavy nature and stagnation at
the summit, which militate against growth:
[T]he country has no wealth inheritance taxes. But wealth
at the top is exploding, perhaps faster than in any other country. In
2000 there were no Indian tycoons among the worlds top-one-hun-
dred billionaires, and now there are seven, more than in all but three
countries: the United States, Russia and Germany. In this category
India outranks China (with one) and Japan (with zero).
A rule of the road: watch the changes in the list of top bil-
lionaires, learn how they made their billions, and note how many
billions they made. This information provides a quick bellwether
for the balance of growth, across income classes and industries. If
a country is generating too many billionaires relative to the size of
its economy, its off balance. If a countrys average billionaire has
amassed tens of billions, not merely billions, the lack of balance could
lead to stagnation. (Russia, India and Mexico are the only emerging
markets where the average net worth of the top-10 billionaires is
more than $10 billion.)
If a countrys billionaires make their money largely from gov-
ernment patronage, rather than productive new industries, it could
feed resentment (which is what sparked revolt in Indonesia in the
late 1990s). Healthy emerging markets should produce billionaires,
but the number must also be in proportion to the size of the nations
economy; the billionaires should face competition and turnover at the
top; and ideally they should emerge predominantly from productive
economic sectors, not cosy relationships with politicians.
It would be interesting at this point to see how the biggest bil-
lionaires actually emerge in our country and what level of monopoly
power they can reach. As an example, let us cast a glance at Mukesh
Ambani, who with net worth of $21.5 billion has retained his title as
Indias richest person for the sixth year in a row.

The Ways of a Super Crony

It is an open secret that the shifting of Jaipal Reddy from the
Ministry of Petroleum and Natural Gas towards the end of 2012
was effected to help Reliance Industries raise the price at which
they can sell gas from the Krishna-Godavari (KG) basin. Reliance

64
had earlier demanded a steep rise in the price of gas from the pre-
viously agreed (the contract was valid up to 31st March 2014) $4.2
per million British Thermal Units (mm BTU) to more than $14 mm
BTU i.e., by more than 300 per cent. In a note prepared for the Em-
powered Group of Ministers (EGoM), Reddy had pointed out that
acceptance of RILs demand would mean an additional profit of Rs
43,000 crore ($8.5 billion) to the company in 2 years even at current
levels of low production and impose an additional financial burden
of Rs 53,000 crore ($ 10.5 billion) on central and state government.
This would in turn mean either higher electricity and fertilizer prices
in the country, or a higher subsidy burden on the government. On
these very valid grounds he turned down the request. The company
retaliated by reducing production by half, falsely claiming that this
was on account of technical hitches. It had also refused to allow a
full audit of its operations and put pressure on Reddy alleging that
policy logjams had been holding up investments in their facilities.
The Congress High Command surrendered to the blackmail. Reddy
was shifted to the portfolio of Science and Technology and a docile
Veerappa Moily brought in. Thanks to the bribe power of RIL, the
principal opposition party and the corporate media remained almost
silent about the whole episode till India Against Corruption sub-
stantially exposed the case.
The change immediately proved effective. When in mid-2013
the Comptroller and Auditor-General (CAG) complained to the
concerned Ministry about RILs failure to cooperate in the audit of
the KG-D6 gas block, Moily gave RIL a clean cheat. About a month
later, in September, the CAG again lodged a complaint with the
government that the company was withholding information on
important issues and once again it was of no avail.
All this is nothing new. Back in 2006, Mani Shankar Iyer was
replaced by Murli Deora, who was quick to sanction the enhance-
ment of RILs capital expenditure estimate from $ 2.39 billion to $
8.8 billion (which meant a big tax advantage) and of gas price from
$2.34 per mm BTU to $ 4.2 per mm BTU. It seems as if, right from
Ram Naik in Vajpayee regime20, RIL has got used to selecting its
own man as Petroleum minister. According to the CAG, there is
strong evidence that RIL has been fraudulently inflating its capital
65
expenditure, because according to the terms of the original contract
this allows it a higher share of profit.
There have been many other irregularities too, all condoned by
successive governments. For example, RIL signed a contract with
National Thermal Power Corporation (NTPC) in 2004 to supply gas
for its power plants at $ 2.34 per mm BTU for 17 years and a similar
contract with Reliance Natural Resources Limited (RNRL). However,
RIL went back on its word. Under RILs pressure, an EGoM headed
by Pranab Mukherjee revised gas price in September 2007 to $ 4.2
per mm BTU. NTPC and RNRL were forced to accept gas from RIL
at the enhanced price, allowing the latter a huge extra profit.
In July 2011 the company sold 30% stake in 21 of 29 oil blocks to
British Petroleum at $ 7.2 billion with government approval, much
like the sale of coal blocks and spectrum for 2G telecommunications
by some of the original allottees at huge illegitimate profits.
In a word, RIL is allowed to behave as if it owns the resourc-
es, ignoring the fact it is but a contractor hired by Government to
extract gas, which is owned by the people of India. Moreover, the
performance of the company in terms of capacity utilisation, cost
of production etc. has been much worse than public undertakings
in petrochemicals. Thanks to such shameless state patronage, in FY
2011 it earned more than Rs.20,000 crore in profit, while its revenues
exceeded Rs.2.5 lakh crore.
And more was yet to come. Using the fig-leaf of the so called
expert Rangarajan Committee21 recommendations (that in place of
the existing administered and negotiated method of pricing natural
gas, India should adopt a single gas pricing formula based on import
parity), the Cabinet Committee on Economic Affairs (CCAE) on 28
June, 2013 announced the doubling of the price of natural gas from
$4.2 per million metric British thermal unit (mmBtu) to $8.4 per
mmBtu for five years from April 2014. The single largest beneficiary
of this decision is going to be the private giant, Reliance Industries,
while the huge cost jack-up that the user industries mainly power,
fertilizer and LPG will face, are mostly in the public sector! That is
why the Urban Development Ministry, Rural Development Ministry,
Chemicals and Fertilisers Ministry and Power Ministry opposed the
hike, but naturally it was the PM-FMs will that prevailed. The duo,
supported by the likes of Ahluwallia, did not bother that the higher
66
price will also mean a higher subsidy bill for fertilizer and power,
thereby draining the national exchequer and burdening the common
person with higher prices of power, transport and food items.
The RIL empire is not limited to petrochemicals, oil, natural gas
and its original breeding ground of polyester fibre. It now covers
special economic zones, fresh food retail, high schools, life science
research, stem cell storage services and what not. It boasts 95%
stakes in Infotel, a TV consortium that controls 27 TV news and
entertainment channels including CNN-IBN, IBN Live, CNBC, IBN
Lokmat and ETV in almost every regional language and owns the
only nationwide licence for 4G broadband. The emperor controls
the Mumbai Indians IPL team and his residence Antilla has 27
floors, three helipads, nine lifts, hanging gardens, ball rooms, weather
rooms, several swimming pools, gymnasiums, six floors for parking
and there are 600 employees to serve their master.
It is not difficult to estimate what could be the combined wealth
of the Ambani family had Mukesh not separated from his billionaire
brother Anil. In April last year he became the first individual from the
private sector to be provided with Z category security, because he is
a national asset, as a spokesperson of the Indian Government put it.

Cronyism as a Deterrent to Growth

To come back to Ruchir Sharma,
Crony capitalism is a cancer that undermines competition and
slows economic growth. That is why the United States confronted the
problem and moved to take down the robber barons by busting up
their monopolies in the 1920s. Ever since the passage of the anti-trust
laws, the American economy has seen constant change in its ranks
of the rich and powerful, including both people and companies.
The Dow index of the top-30 US industrial companies is in constant
flux and, on average, replaces half its members every 15 years. In-
dias market used to generate heavy turnover too, but in late 2011,
twenty-seven 90 per cent of the top 30 companies tracked by the
benchmark Sensex index were holdovers from 2006. Back in 2006
the comparable figure was just 68 per cent. This is emblematic of
a creeping stagnation at the upper echelons of the elite
67
 It is not that Sharma denies the high growth rate and certain
strong features of the Indian economy. But he believes that the hul-
labaloo about the growth miracle is nothing but an illusion much
like the rope tricks Indian street magicians used to play in colonial
India, from which he derives the highly suggestive title to his essay.
Like Sharma, Raghuram Rajan (previously Chief Economist at the
IMF, brought in first as Chief Economic Adviser to the PM and then
promoted to the Governorship of RBI) used to be highly critical of
what he saw as privatisation by stealth (his version of what we call
accumulation by dispossession/encroachment?). He argued that the
predominant sources of wealth in India are land, natural resources,
and government contracts and pointed out that after Russia, India has
the largest number of billionaires in the world per trillion dollars of
GDP. If we let the nexus between the politicians and the business-
men get too strong, he warned, we could shut down competition.
That could slow us down tremendously (Times of India, Jul 31,
2010). Rajan also warned about the possibility that the emerging
oligarchies could control major businesses and consequently gov-
ernment policy and lead the country to a middle income trap due to
corruption and cronyism as evidenced in countries like Mexico. It
is another matter that now Rajan is ensconced as the RBI Governor
and we hardly hear him say anything about the pitfalls of cronyism.
Meanwhile, the power of cronies is growing apace. The Radia
tapes have demonstrated how Members of Parliament, under the
influence of corporate lobbyists, acted to benefit specific corporations
on a host of policy issues. Rather than punishing the guilty, it is be-
ing proposed that lobbying should be legalised even as the official
Lokpal Bill says that such corrupt conduct by elected representatives
cannot be investigated by the Lokpal. Indeed, extrapolating what
Mukesh Ambani commented in a private conversation, we can say
all ruling parties have really become apni dukan own shops of
the biggest corporatehouses.

68
 Deceptive White Paper on Black Money
The issue of black money is one that is raised now and then, hotly
debated in every public forum, demands and promises are made for
unearthing it, and then with the dust slowly settling down, other
issues come to occupy the centre stage. What we are left with are
updated estimates of black money, even as the parallel economy goes
on flourishing more vigorously than the official economy.
Soon after independence, Cambridge economist Nicholas Kaldor
had estimated the size of Indias black economy at 2-3% of its official
or white GDP for the financial year 1955-56, and a Direct Taxes
Enquiry Committee (Wanchoo Committee) had arrived at an estimate
of 7% of white GDP for late 1960s. Arun Kumar in The Black Econo-
my of India (Penguin Books, New Delhi, 1999) estimated the size of
Indias black economy as approximately 40% of its white GDP for
the financial year 1995-96. From Kaldors to Arun Kumars estimate,
it is a 16-fold increase in the relative size of the black economy. As
per Kumars estimates for 1995-96, around four-fifths of Indias black
gross domestic income is generated through legal economic activity,
and overwhelmingly this tends to be property incomes rather than
incomes derived from business or other work.
The latest document on this topic is the Government of Indias
White Paper on Black Money which, as expected, is only an exercise
in mass deception. It does not call for abolishing the most widely
used methods of money laundering, such as participatory notes
(PNs) an instrument which allows a foreign investor to invest in
Indian securities but remain anonymous to Indian regulators. Nor
does the document disapprove of the preferential routing of foreign
investment through Mauritius, Cayman Islands and Singapore
(which is frequently used by resident Indians for round tripping,
i.e., for investing black money in their own companies and also by
foreign investors to avoid payment of taxes) even after admitting that
huge investments coming in from these tiny states could be black
money re-entering India as white. And the big question the ac-
tual amount of black money in India was left totally unanswered.

CFMNZhvwQ
70
 VI

Towards a People-centric
Eco-friendly
Development Agenda

No unbiased observer would deny that the economic situation

in India is indeed frustrating. Nor would anyone say things were
any better in the past. More than 60 years have been spent blam-
ing this or that economic model/strategy and this or that political
party/coalition for this sordid state of affairs. Is it not high time we
recognised it as a grave systemic problem basically caused by internal
deficiencies and distortions and further accentuated by the global economic
turmoil? And searched for a real solution radical but practicable,
difficult and time-taking but achievable step by step?

Lessons from International Experience

Well, this search could be facilitated if we spared some time look-
ing at the recent international experience. Since the Indian context is
very different from those of the worlds richest countries like the US
and Germany, it would be of little help discussing their cases. As for
troubled countries like Greece, Cyprus, Iceland etc., the central lesson
is that stringent austerity measures imposed in these countries un-
der pressure of international finance capital have proved absolutely
counter-productive. These economies have been contracting for years
together as a result of expenditure cuts while peoples hardships are
growing, compelling them to overthrow governments even recently
elected ones like the pseudo-left government in Iceland in April last
71
year and staging powerful street protests (as in Turkey and Brazil
very recently). If anything, the experience in these countries can only
teach us what we should not do.
Positive lessons can of course be learnt from Latin America. Led
by Cuba and Venezuela in particular and ably supported by other
countries like Bolivia and Ecuador, the Bolivarian Alliance for our
Americas (ALBA) is building an alternative to the US dominated
trade with the aim of regional economic integration based on coop-
eration for mutual social welfare, bartering and economic aid. To
further deepen Latin American integration and challenge American
domination, ALBA has been followed up with CELAC (the Commu-
nity of Latin American and Caribbean States) comprising 33 sovereign
countries in the Americas excluding the USA and Canada. These
are highly inspiring and instructive collective endeavours; something
which countries in the Indian subcontinent could perhaps try and
emulate, with the largest among them taking the lead.
Again, we can gain some useful insights from the experience
of our major northern neighbour. Both India and China are ancient
Asian nations with close cultural and economic ties spanning centu-
ries; currently both are poster boys of globalisation, economic reform
and high-speed capitalist development. Yet, as we shall just see, apart
from structural differences there are subtle but vital differences in
the political attitudes and economic policies of the two governments,
which account for very different results of reform.

Chinese Experience as a Reference Point

Everybody knows that our country attained independence two
years before China did. It was in a better situation at that time in
terms of industrialisation and availability of cultivable land as well
as several mineral resources like coal and iron. Pranab Bardhan,
however, gives us some more interesting information:
India was slightly ahead of China in 1870 as well as in the 1970s
in terms of the level of per capita income at international prices, but
since then, particularly since 1990, China has surged well ahead of
India. Indias per capita income growth rate in the past two decades
has been nearly 4 percent. Chinas has been at least double.22
72
 In other words, the strategy of opening up and reform in the era
of globalisation has been incomparably more successful in China
than in India. There are many important reasons, not the least being
the much stronger fundamentals built up in China in the pre-reform
decades despite many mistakes and the disastrous economic impact
of the Cultural Revolution.
There is a common misconception that Chinas spectacular
growth in recent, i.e., post-reform decades have been export- driven
from the very start. Bardhan, however, has shown that in terms of
growth accounting, the impact of net exports on Chinas growth in
the period 1990-2005 has been relatively modest compared to the
impact of domestic investment or consumption. Second, China had
major strides in foreign trade and investment mainly in the 1990s
and particularly in the subsequent decade; yet already between
1978 and 1993, before those strides, China had a very high average
annual growth rate of about 9 percent. ...much of the high growth in
the first half of the 1980s and the associated dramatic decline in poverty
happened largely because of internal factors, not globalization. These
internal factors include an institutional change in the organization of
agriculture, the sector where poverty was largely concentrated, and
an egalitarian distribution of land-cultivation rights, which provided a
floor on rural income-earning opportunities, and hence helped to alleviate
poverty. Even in the period since the mid-1980s domestic public
investment in education, agricultural research and development, and rural
infrastructure has been a dominant factor in rural poverty reduction in
China.23 [Emphases added]
Thus, right up to 2005 domestic investment and consumption,
with state spending leading the way and great emphasis laid on
agriculture and rural economy, played the major role in both poverty
alleviation and GDP growth, the two unlike in India marching
hand in hand at least to some extent. This, together with the decisive
non-dependence on foreign capital, is an important lesson to be
drawn from the Chinese experience.
Secondly, Beijing did concede many conditions or demands of
the WTO and imperialist finance capital to integrate itself more and
more closely with the global capitalist economy and to lure MNCs
to relocate part of their manufacturing operations to China. But all
this was done with a long-term vision of strong economic national-
73
ism (whether this could be construed as part of building socialism
is an entirely different debate) that stands in complete contrast to
the blatantly comprador attitude of successive Indian governments.
Often enough the present PM and FM speak and behave like agents/
apologists of imperialism24 even as major appointments in the coun-
trys financial establishment are made from WB/IMF stock (see
box). The practical result of this difference is for everyone to see:
the enormously superior economic, and therefore political, strength
of China in the community of nations.
Third and most relevant in the current context is the prompt,
flexible and independent (in relation to the constant flow of sermons
and allegations from Washington) policy decisions the Chinese
government has been taking in the national interest. In a way this
was much more difficult for China than India because the degree
of integration with the global (especially American so much so
that the two economies came to be described as ChinAmerican)
capitalism was considerably higher.
Thus in 2008 Beijing launched an economic stimulus package
worth $585 billion. But unlike the bailout packages for the greedy
banks responsible for the crisis in America and Europe, here the
stress was on vastly improving domestic infrastructure (which
served to ease, to some extent, the unemployment caused by closure
of export-oriented industries while laying a broader base for future
development) and lowering the currency exchange rate (to make
Chinese exports more competitive in a tight market, ignoring threats
of retaliatory action from the US and EU). The result was apparently
brilliant: facilitated by an easy credit policy, the growth rate rose from
6.6% in the first quarter of 2009 to 12.1% in the first quarter of 2010.
But soon the government noticed symptoms of overheating,
such as consumer price inflation and a housing price bubble. It
took steps like curbing bank credit, and investment expenditures by
public sector corporations. But such measures had only short-term
effects. Moreover, much of the newly built roads, bridges etc. were
lying largely unutilised. The government then opted for a major
change in policy framework: a shift of emphasis from investment to
consumption. For this purpose various measures were taken, e.g.,
tighter control on property speculation, including the revival of a
20% capital gains tax. As a result the contribution of investment to
74
 The
World Bank / IMF North Block / Mint Street
Revolving Door
James Petras wrote about a revolving door from Wall Street to the
Treasury Department to Wall Street, with top bosses in private financial in-
stitutions joining the US Treasury to ensure that everything Wall Street needs
are easily granted and then return to the private sector in higher positions.
We witness in our country a variation of such revolving door between the
Breton Woods Institutions and the economic apparatus of the Indian state.
The trend became conspicuous since 1990s, when aping America in
almost everything became standard practice with Indian policy-makers.
Manmohan Singh himself was Alternate Governor for India, Board of Gov-
ernors, IMF, during 1982-85. Montek Singh Ahluwalia, an Oxford graduate
who worked in the World Bank under Robert McNamara in early 1970s and
for some time also with the IMF, was appointed Secretary, Department of
Economic Affairs under Finance Minister Manmohan Singh, before becoming
Finance Secretary in April 1993 despite protests by IAS officers who were an-
noyed that such a post was given to a non-IAS officer. He served as a member
of the Planning Commission from 1998 to 2001 and went back to IMF in July
2001. Three years later, he was brought back to India as Vice-Chairman of
the Planning Commission. In recognition of his exemplary service in helping
impose IMF-inspired neoliberal policies by fabricating figures (recall how
he scaled down the poverty line) and other means he was awarded Padma
Bhushan in 2011.
Another high profile appointment was that of Raghuram Rajan, who
served as Chief Economist at the IMF from October 2003 to December
2006. In November 2008, Manmohan Singh appointed him as an honorary
economic adviser and in August 2012 he was appointed as Chief Economic
Advisor (CEA) to the Government of India. In September 2013, he became
the governor of Reserve Bank of India.
Not that there is no reverse flow. Kaushik Basu, who was CEA before
Rajan, has taken up the same position which Rajan had previously occupied:
Chief Economist at the IMF. Then there is Dr. Rakesh Mohan, previously
Deputy Governor of the Reserve Bank of India and also Secretary in the
Department of Economic Affairs, who has recently assumed charge as Ex-
ecutive Director on the Board of the International Monetary Fund (IMF). In
addition to India, Dr. Mohan will also be representing Sri Lanka and Bhutan
on the Board of the IMF.

75
Chinas growth came down from over 50% to about 30%, with a
corresponding rise in the contribution of consumer spending. The
Chinese government has expressed its readiness to accept some re-
duction in the quantity of growth for the sake of improving the
quality and efficiency of growth.
The new approach to growth is also conducive to reducing in-
equality. According to figures released by the Chinese government,
inequality rose when growth was high and fell when it slowed. To
quote from an article in the online edition of Peoples Daily, Chinas
first release of the Gini coefficient for the past decade demonstrated
the governments resolve to bridge the gap between the rich and
the poor. Although the Gini has been falling, at 0.474 it is still well
above the red line of 0.4 set by the United Nations. Drawing attention
to this fact, Ma Jiantang, director of the National Bureau of Statis-
tics, said, the statistics highlighted the urgency for our country to
speed up income distribution reforms to narrow the wealth gap.25
Meantime, foreign trade continued flourish better than most other
countries: by the end of 2013 China surpassed the US as the worlds
largest trading nation in merchandise.
All this does not make China, with its rampant corruption and
many other vices, a model for India to emulate. But of course we can
criticality assimilate certain aspects or features of the ever-changing
Chinese economy in keeping with our own conditions and priori-
ties. The foremost among these is an independent economic policy
geared to the peoples interests, a policy based on the concerned
states autonomy in relation to global finance capital.

Towards a Radical Left Alternative

Periodic crises, we learnt from our brief dialogue with Marx in
Crisis of Neoliberalism and Challenges before Popular Movements (see
second and third covers of the present pamphlet), are an integral,
organic, necessary part of capitalist accumulation. So the only way
to really get rid of crises is to get rid of capitalism itself, to move
towards socialism. Yes, socialism sans all dogmatic presuppositions,
socialism conceived as a system where all means of production are
socially owned, where everyone enjoys equal rights and opportu-
76
nities, while free all-round development of each is a condition for
development of all.
Well, this is our long-term goal. But we cannot leap-frog to
that height from the abysmal depths of human degradation (partly
hidden though by the glitter of a superficial and distorted capitalist
growth) that our country finds itself in. We have to first unfetter
the productive forces, especially in agriculture which still employs
more than 50% of Indians, so as to create the material conditions
for building socialism as a higher, more efficient form of economic
organisation; and at the same time achieve genuine, participatory,
peoples democracy as distinct from the parliamentary farce we are
now treated to. For that we need nothing short of a peoples dem-
ocratic revolution with agrarian revolution as its axis. The primary
aim of this democratic revolution will be to sweep away all feudal
remnants, abolish imperialist domination, restrain and control big
capital by effective taxation, nationalisation and other means, and
democratise the entire apparatus and mechanism of governance. It
will usher in the rule of workers, peasants, progressive sections of
middle classes and intelligentsia i.e., a peoples democratic state
which will take care not only of our economic problems but attend
to a broad spectrum of organically interlinked tasks ranging from
thorough democratisation of society and polity to progressive cultur-
al transformation. Victorious democratic revolution will in this way
build the material and cultural prerequisites for an uninterrupted
socialist transition.26
With this general orientation, we can now try and jot down some
of the basic points of a Peoples Alternative to the official policy
frame.
1. Overcome foreign capital fetishism and rely instead on gener-
ation of domestic demand and capital formation, for such a course
alone can augment inclusive and therefore sustainable economic
development. The reason behind the governments craving for more
foreign capital inflow is to be located not just in the top policymakers
personal inclinations, though that is not unimportant. At a deeper
level, it is the essential logic of the growth trajectory chosen by the
Indian state with full concurrence of the monopoly bourgeoisie, both
of which betray a comprador mindset of the globalisation era. The
overall experience of the last two decades confirm that the long-term
77
ill effects of depending on enhanced inflow of foreign capital as a
growth steroid far outweigh the temporary and superficial benefits.
So it is high time India got rid of this drug-addiction-like-syndrome.
The latest decision of further relaxing the cap on foreign investment
in a whole range of sectors including insurance, public sector banks,
commodity and stock exchanges etc. must be revoked.27
2. Let there be a development model that is people-centric and
not geared to the interests of indigenous and foreign big capital.
Reject the monetarist orthodoxy imposed by finance capital and the
rating agencies. Stop arguing that all government spending must be
indiscriminately reduced28 for controlling inflation because (a) in
the Indian context of capacity underutilisation and unemployment,
higher spending in productive sectors leads to higher incomes and
therefore higher revenues for the government and (b) much of the
current inflation is of the cost-push kind rather than demand-pull
type, which should be countered not by expenditure cutting but
through steps like re-imposing controls on prices of petro-products
and reducing various administered prices and charges. In other
words, expand government spending on employment-generating
schemes, genuine food security (not something like the electoral stunt
of the Food Security Act), healthcare, education, technology and
environment and so on. All this will not only improve our quality
of life (and hence labour productivity too) but also stimulate the
economy internally, without being dependent on external stimuli. To
fund such public investment, move beyond the tokenism of one-time
surcharge on the super rich and adopt measures like raising the tax-
to-GDP ratio from the current low of about 17% by imposing higher
taxes on big business and rich individuals, stopping or drastically
reducing the bad practice called revenue foregone and the like.
3. Rather than imposing austerity on the working people, whose
incomes stimulate demand and therefore the economy, curb the
enormous wasteful expenditure on foreign trips, five-star living
etc. of our ministers, MPs and top officials. As President of India
Pratibha Singh Patil spent Rs. 206 crore on foreign tours (the highest
ever), Rs.6 crore on a newly-fitted car, and after retirement, got a
sprawling bungalow built for herself on military land in Pune. Again,
as against Rs.47 crore budgeted for their tour expenses in 2011-12,
Central ministers spent Rs.400 crore, compared to just Rs.56 crore
78
in the previous year. The ruling politicians in our country have a
special knack for innovating ways to fatten themselves on taxpayers
money. When the penchant for jumbo ministries was sought to be
curbed by statutory restrictions, leaders left outside the ministries
began to be adjusted as heads of newly floated paper corporations
and in other lucrative positions. Such practices must be stopped. The
ever-growing military budget and the huge expenditure on largely
non-urgent space programmes must be curtailed to release funds
for pro-people productive investments. And rather than fighting the
CAG and the Supreme Court to save corrupt persons and practices,
the government must take matching measures to punish the guilty
and plug the loopholes in law and governance.
4. Stop behaving like a US agent and regional hegemon in South
Asia, develop genuine friendship and closer economic relations with
neighbours in particular and third world countries generally. Discard
high-cost, high-risk atomic energy projects imposed on the nation
by imperialist countries and the atomic energy lobby in India; stop
handing over national resources to the likes of Mukesh Ambani and
increase production/generation of energy in the public sector under
effective workers/public surveillance; ignore US pressure and access
cheaper energy sources like Iran.
5. Scrap anti-farmer legislations like the SEZ Act and the new
Land Acquisition Act, pass agricultural land protection legislation
to stop the agony of eviction for development, introduce effective
land reform measures and urban land ceiling Acts to name a few
measures that will promote inclusive development. Public invest-
ment in agriculture (irrigation, storage and marketing infrastructure
etc) and allied sectors like poultry, dairy and pisciculture must be
enhanced several times to strengthen the base of the Indian economy
and ensure affordable healthy diet for all Indians.
6. Adopt a time-bound phased programme of regularising
casual/contractual labourers, starting with those employed in
government/semi-government undertakings, such as construction
workers, honorarium-based workers in the social sectors, and so on.
Such measures will go a long way in boosting the home market and
thereby countering stagflation.
An alternative economic programme, incorporating but certainly
not limited to the above proposals, needs to be formulated through

79
open, broad consultations, widely propagated and fought for. While
uniting with progressive and democratic forces in this struggle, the
Left should try and leave its imprint on the democratic movement by
consistently connecting every single issue of immediate concern to
the broader, higher agenda of comprehensive social transformation.
Take one instance the issue of corruption.
In the foregoing pages we saw that with a distinct role reversal
of the state from a regulator of private investment to its servile
facilitator, with the rise of corporations too big to control, and the
accelerated influx of predatory finance capital, we now have in
place a new model of almost legalised, institutionalised corruption.
Even there are instances where government officials and ministers
collude with private interests to economically undermine PSUs, so
that private players can expand their market share at the cost of the
latter. The example of BSNL readily comes to mind a case compa-
rable to the KG basin gas reserve, which was discovered by ONGC
with public money and then transferred to RIL for private plunder
of these invaluable public resources.
In a situation like this, where political and corporate corruption
feed on each other, the gang of four neoliberalism, corporate plun-
der, cronyism and corruption must be fought together, because they
exploit and oppress us together. In other words, fighting corruption
is not merely a matter of good governance and punishing guilty
individuals. More important, it is about relentless struggle for basic
course correction in policy, for a paradigm shift in the very orienta-
tion and mechanism of development and governance, with peoples
economic and political empowerment at its core. We must therefore
put forward concrete demands like protection of agricultural, forest
and coastal land, and comprehensive rights of gram sabhas over
these; confiscation of black money and illicit wealth; and national-
isation of mineral resources, extraction of which have proved to be
the main breeding grounds of corruption and corporate plunder.
Then again, the movement should be directed not only against
mega scams and macro issues, but equally against the all-pervasive
everyday corruption at the micro level, such as in PDS, municipal
and panchayat affairs, various schemes like the NREGA, and so on.
This is crucial for building up the struggle from the grassroots, for
involving the broad masses in this movement on the basis of their

80
lived experience. Equally important, this must not remain a single
issue struggle but advance as part of a broader movement informed
by a vision of comprehensive change.
To conclude, the economic crisis is, and increasingly will be,
leading to all kinds of social and political turbulence. Disillusion-
ment, frustration and anger are developing among all but the most
privileged. This is the time to push for an alternative development
discourse. The Left must, rather than merely criticising the govern-
ments and ruling parties for the economic mess they have created,
make full use of the situation for this purpose. The ongoing struggle
for economic justice and thoroughgoing democracy must be led to
its consummation.

CFMNZhvwQ

81
 - Endnotes -
1 Indias Foreign Exchange Reserves: A Shield of Comfort or an Albatross? EPW, April
5, 2008.
2 Throughout this pamphlet, last year refers to calendar year 2013.
3 A phrase popularised by Prof. Raj Krishna in the seventies, during the period of
increasing controls and slowing growth rate.
4 Occasional Paper Indias economic growth history: fluctuations, trends, break points
and phases, Arvind Virmani, January 2005, INDIAN COUNCIL FOR RESEARCH ON
INTERNATIONAL ECONOMIC RELATIONS, New Delhi; www.icrier.org
5 It was during her second term itself that the move towards liberalization had start-
ed slowly and became conspicuous later under Rajiv Gandhi.
6 Entry on Planning, The Oxford Companion to Economics in India, Kaushik Basu
(ed), Oxford University Press, 2007, p 400
7 ibid, p 233
8 FDI in India Ideas, Interests and Institutional Changes, EPW January 18, 2014.
9 This is nothing but a convenient name for the Indian version of neoliberalism,
which has been developed since the 1990s by a host of bourgeois ideologues,
bureaucrats and political parties in sync with international trends and domestic
conditions.
10 The combined growth rate of ITES-related exports and workers remittances fell to
4 and 8 per cent in 2009-10 and 2010-11 respectively. It recovered to 20 per cent in
2011-12, but then fell again to an estimated 4 per cent in 2012-13.
11 According to the GHI 2012 Report, Between 1990 and 1996, GHI score was
falling commensurate with economic growth. After 1996, however, the disparity
between economic development and progress in the fight against hunger wid-
ened In two other South Asian countriesBangladesh and Sri LankaGHI
scores were also higher than expected but decreased almost proportionally
with GNI per capita growth.... China has lower GHI scores than predicted
from its level of economic development. It lowered its levels of hunger and
undernutrition through a strong commitment to poverty reduction, nutrition
and health interventions, and improved access to safe water, sanitation, and
education. In India, 43.5 percent of children under five are underweight
from 200510, India ranked second to last on child underweight out of 129
countries below Ethiopia, Niger, Nepal, and Bangladesh. [W]omens poor
nutritional status, low education, and low social status undermine their ability
to give birth to well-nourished babies and to adequately feed and care for their
children . According to surveys during 200006, 36 percent of Indian women
of childbearing age were underweight, compared with only 16 percent in 23
Sub-Saharan African countries
11-A Edward Luce, In Spite Of the Gods, Little, Brown Book Group, London 2006, pp 48,
342, 344
11-B Pranab Bardhan, Awakening Giants, Feet of Clay, Assessing the Economic Rise of
India and China, Princeton University Press, Princeton 2010, p 130.
12 The Indian Ideology, Three Essays Collective, Gurgaon, 2012, pp 162-63
82
13 Census of India, 2001 and 2011
14 CR, SLR, repo rate and reverse repo rate are tools used by a countrys central bank,
in our case the RBI, to control liquidity in the system. Cash reserve ratio refers to a
portion of deposits (as cash) which banks have to maintain with the RBI. When CRR
is increased, banks have to keep more money with the RBI, so they can lend less
to business and others. The opposite happens when it is reduced. Banks are also
required to invest a portion of their deposits in government securities this is called
statutory liquidity ratio. When SLR is increased, banks have to invest more money
in government securities, so they can buy (invest in) relatively less of non-govern-
ment shares etc., and vice versa. Both CRR and SLR are thus used by the RBI to
control banks capacity to pump less or more money into the economy.
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap be-
tween the money they require for meeting their customers demands for loans and
how much they have on hand to lend. If the RBI wants to make it more expensive
for the banks to borrow money (thereby discouraging them to lend), it increases
the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it
reduces the repo rate. Reverse repo rate is the exact opposite of repo rate. It is the
rate at which RBI borrows money from the banks. An increase in this rate encourag-
es banks to lend more to the apex bank and less to business, making credit tighter
in the market. Special purpose vehicle is an entity (a company) formed for a single,
well-defined and narrow purpose. SPVs are mostly formed to raise funds from the
market.
15 See Genuflecting Before Finance Capital (EPW editorial, April 27, 2013).
16 In yet another example of grotesque insensitivity, the Planning Commission
(PC) has recently come up with a new poverty line, using the old and discredited
methodology suggested by the Tendulkar Committee in 2010 (which was criticized
for fixing poverty lines at merely Rs.22.42 per person per day in rural areas and
Rs.28.65 in urban areas) which draws the line at Rs 27.20 per capita per day in
rural areas and Rs 33.40 in urban areas. On this basis the P C now estimates that
the aggregate incidence of poverty has fallen from 37.2 per cent of the population
in 2004-05 to 29.8 per cent in 2009-10, to 22 per cent in 2011-12 (25.7 per cent in
rural areas and as low as 13.7 per cent in urban India). Once again these unbeliev-
able figures and Congress leaders absurd statements in their support have been
greeted with contempt, ridicule and anger. Clearly, the UPA Government is using
the PC as a propaganda machine to claim great success in poverty alleviation during
the run-up to the Lok Sabha elections.
17 Agencies like Standard and Poors, Moodys, Credit Suisse et cetera started with rat-
ing (measuring) the dependability of financial institutions but since the onset of the
global financial crisis began to rate also the creditworthiness of sovereign nations
in terms of various indices like fiscal and current account deficits as percentage of
GDP. Using the atmosphere of extreme uncertainty, they have acquired a decisive
voice in determining the degree of dependability of states as destinations of foreign
investments. The agencies boast of an apparently scientific and impartial credit
rating mechanism, although in many cases, involving both financial institutions and
states, their assessments have proved to be awfully wrong. All the same, a lower
rating for any state makes it less attractive for foreign investors. Such influence of
CRAs is a measure of the dominance of monetarist orthodoxy now called new
consensus macroeconomics in economic policy-making across the globe. How-

83
 ever, starting with Australia a few countries including the USA are now challenging
the arbitrary ratings of the agencies in courts of law.
18 The genesis of cronyism in India can be traced back to the early 1970s when an
inexperienced Sanjay Gandhi was awarded a license to manufacture 50000 Maruti
cars, considered a very big quantity at the time.
19 Appears in Breakout Nations: In Pursuit of the Next Economic Miracles, Allen Lane,
2012
20 It was during NDA regime in the year 2000 that RIL got this contract, which gave
the company many undue and absolutely unusual benefits.
21 For details, see Liberation, August 2013, Pricing Natural Gas: UPAs Latest Gambit
for Reliance by Tapas Ranjan Saha
22 Pranab Bardhan, Awakening Giants, Feet of Clay, Assessing the Economic Rise of
India and China, Princeton 2010, p 12
23 Ibid, p 17
24 The rare doggedness with which Manmohan Singh got that charter of modern-day
national slavery -- the Indo-US nuclear deal passed in parliament after a long and
tough battle and, more recently, batted for US corporations to dilute the liability of
reactor suppliers in case of accidents, is well-known. He is no less grateful to the
erstwhile colonial masters. Addressing a District Collectors Conference in Delhi in
May 2005, he declared that the British Empire was an act of enterprise, adventure,
creativity. Speaking at Oxford the same year, he said the freedom struggle did
not deny the British claim to good governance, but was merely a natural bid for
self-governance. The profuse praise of British rule in India and the excessive zeal
on the issue of Indo-US nuclear deal were only two of numerous instances indicat-
ing a patently snobbish attitude of the class he represents: the Indian big bourgeoi-
sie.
25 See C P Chandrasekhar, Is China Changing? (The Hindu, February 1, 2013)
26 For more, see General Programme of CPI (ML) adopted by its Ninth All India Con-
gress in Documents of CPI (ML): General Programme, Constitution, Delhi 2013,
pp 8-9 and p 12. The basic socio-economic programme which, we believe, can
stand the Indian economy on a completely new, relatively prosperous and definitely
much more egalitarian basis is outlined as follows:
Promotion of rapid self-reliant, sustainable and balanced economic develop-
ment and eradication of mass poverty:
a. robust agrarian development based on thoroughgoing land reform and
comprehensive state assistance to agriculture;
b. protection of agricultural land and nationalisation of all mineral resources
and oil and gas;
c. comprehensive industrialisation making judicious use of the countrys
natural and human resources;
d. promotion of small and medium enterprises, assisting them with insti-
tutional credit and marketing facilities, promotion of handicrafts and
indigenous products, helping them organise into cooperatives;
e. meeting the countrys growing energy needs by self-reliant means, re-
ducing dependence on external sources, avoiding dangerous options like

84
 nuclear energy and big dams, and promoting alternative and renewable
means of energy generation;
f. transfer of the reins of national economy from the hands of the monop-
oly-multinational-mafia-landlord-kulak nexus to the state and various or-
ganisations of the people, confiscation of black money and illegal wealth
held domestically or abroad;
g. creation of a powerful home market by developing the purchasing power
of the common people, ensuring massive state procurement of agricultur-
al produce and provision of basic goods and services for all;
h. vesting the working people with effective say in policy-making and pro-
duction and stopping brain drain by creating adequate domestic opportu-
nities for the highly skilled and promoting indigenous R&D;
i. re-ordering the present priorities and reorienting the existing policies to
suit the needs of self-reliance, public welfare and a dignified life for the
working people with a higher standard of living;
j. radically improving the condition of the working class by abolishing con-
tractualisation of work, ensuring full trade union rights with secret ballot,
protecting collective bargaining and right to strike, fixing and ensuring a
living wage for all workers, ensuring social security measures for disabled
and retired workers, strictly enforcing the policy of equal pay for equal
work, abolishing child labour and effecting progressive reduction of work-
ing hour.
Ensuring comprehensive public amenities and welfare:
a. putting an end to privatisation and commercialisation of public amenities
and ensuring universal right to food, right to free and quality education at
all levels, right to work, right to free and quality health care, right to basic
amenities like drinking water, housing and sanitation, public transport,
and sports and recreation facilities; universal child care; care of the old,
disabled and distressed; provision of adequate training and opportunities
for all deprived and disadvantaged sections to ensure effective social
justice;
b. preserving ecological and environmental equilibrium, taking preventive
measures against epidemics and infectious diseases and putting in place
effective programmes and systems to prevent, minimise and manage
natural calamities and the disastrous impact of climate change;
c. discarding the dogma of development through displacement, ensuring
effective rehabilitation and resettlement of refugees of corporate-led
development strategy, and guaranteeing the traditional forest and liveli-
hood rights of indigenous people and forest-dwellers. (ibid, pp 18-20)
27 As for the Indian peoples response to the governments policy of wooing big cap-
ital, the latest and one of the strongest signals came in July-August when Vedanta
Aluminiums controversial plan to mine the Niyamgiri hills for bauxite received a
major jolt. Local tribal people unanimously rejected the proposal, claiming religious
and cultural rights over the entire hills, in all 12 pallisabhas or village meetings held
under an April 18 Supreme Court order in appeal against the project. This means
the project will have to be abandoned, unless Vedanta and its chief sponsor P Chid-
ambaram together find ways to circumvent the SC Order.

85
28 Incidentally, China plans to raise its budget deficit by 50 percent this year. China
needs to appropriately increase the fiscal deficit to maintain support for economic
growth and restructuring, the finance ministry said in a recent report. The gov-
ernment will ensure funding for key areas such as agriculture, education, medical
and health care, social security, employment, government-subsidized housing and
public culture, it said.

CFMNZhvwQ

86
.. Contd. from 2nd Cover

The central message emanating from the latest financial

catastrophe and its aftermath is that global capitalisms strategic
response to the crisis of 1970s has failed. That was a three-pronged
strategy comprising deregulation or market fundamentalism,
globalisation and financialisation. Since these were the three pillars
on which post-1970s capitalism stood and, in certain parts of the
world, flourished the extensive damage they have suffered have
left the whole imposing edifice tottering. This is why there is no end
to aftershocks like the European Sovereign Debt Crisis. This is why,
full five years after the onset of the crisis, the world economy is still
in the doldrums.
But even a systemic crisis like the present one does not
necessarily mean that the system is going to collapse anytime
soon. The question is, who will bear the burden of the stubborn
recession into which the financial catastrophe of 2008
metamorphosed? The common people? Or the big banks and
corporate honchos responsible for the breakdown yet bailed out
by governments? An intense struggle to decide this all-important
question is now going on across the world in multiple forms
intellectual debates, street battles and parliamentary struggles.
All of us must join the fight with all our might, for a rollback
of the neoliberal policy regime and progressive reform now
and ultimately for revolutionary transformation of this irrational,
oppressive, inhuman social order.

87
 Did you think India will shine again if somehow say by wooing FDI,
cutting subsidies and further opening up of the economy the yesteryears high
GDP growth could be brought back? And that will make us a happier people?
Think again. And get the basic facts right.
The current crisis notwithstanding, our country is considered an IT
superpower with one of the worlds highest rates of growth in the number of
dollar millionaires and billionaires, and Indian corporates spreading their wings
in global skies. Affluent India revels in conspicuous consumption and unbridled
accumulation. But the massive foundation that produces all the wealth remains
mired in the dark depths of deprivation. Such cruel contrast, it is necessary
to note, is a direct result of our highly skeweddevelopment strategy. As the
Global Hunger Index 2012 Report says, Between 1990 and 1996, GHI score [a
lower score indicates lower incidence of hunger, and vice versa A Sen] was
falling commensurate with economic growth. After 1996, however, the disparity
between economic development and progress in the fight against hunger
widened In two other South Asian countries Bangladesh and Sri Lanka GHI
scores were also higher than expected but decreased almost proportionally
with GNI per capita growth.... China has lower GHI scores than predicted
from its level of economic development. It lowered its levels of hunger and
under-nutrition through a strong commitment to poverty reduction, nutrition
and health interventions, and improved access to safe water, sanitation, and
education. India ranked second to last on child underweight out of 129
countries below Ethiopia, Niger, Nepal, and Bangladesh. [W]omens poor
nutritional status, low education, and low social status undermine their ability to
give birth to well-nourished babies and to adequately feed and care for their
children . According to surveys during 200006, 36 percent of Indian women
of childbearing age were underweight, compared with only 16 percent in 23
Sub-Saharan African countries
Well, such are the consequences of two decades of economic reform
carried out by successive governments at central and state levels. So nothing
short of a total rollback of the neoliberal policies imposed on us in the name of
reform and development will lift India out of the morass. That, of course, should
not mean a return to the bad old days, a new opening is always possible. An
inclusive, egalitarian, gender-just, environment-friendly policy framework must
replace the current devastating policy regime, which pushed the advanced
capitalist countries into a severe crisis a few years ago (the recession and other
problems are far from over) and is now doing the same to India.
Obviously, such a fundamental change can only be achieved through
a hard, protracted struggle. Let us rise to the occasion, let us join this urgent
battle.

INDIA IN THE GRIP OF DEEP ECONOMIC CRISIS:

CAUSES AND QUESTS FOR SOLUTION
A uthor : A rindam S en , D irector , IIMS
February 2014 ; Price: Rs. 30
Published by: Prabhat Kumar, for CPI(ML) Central Committee
Charu Bhawan, U-90 Shakarpur, Delhi 110092
Phone: 91-11-22521067
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