India in the Financial Crisis

1
India in the Financial Crisis

• IIPPE Financialisation Working Group
• "The Financial Crisis and Developing Countries
• SOAS
• 2 December 2008

2
Outline

• The popular questions
• The 2008 Crisis causes and triggers
• Effects on the Third World Generally
• Distinctiveness of the Indian experience
• India A potted history of the Indian economy
• 1947-69 Planned Development and its Abandonment
• 1969-1984 Liberalization by Stealth
• 1984-1991 Domestic liberalization
• 1991-2001 Global Opening?
• 2001 to present Mini Credit Fuelled Industrial
  Boom
• The Present Financial Crisis
• Financial Transmission Mechanisms for India
• Recession Transmission to India
• A Turning Point in Indian Economic History too?
• Sources and Acknowledgements

3
Inquiring Minds want to know...

• Decoupling or Contagion (Financial and/or Real)?
  Growth slowdown?
• Protectionism versus Globalization?
• End of growth-producing Reforms?
• Fate of Outsourcing?
• Inflation?
• End of Indian MAs?
• Assumptions Neoliberal policies fuel recent
  tiger like growth
• Strong Fundamentals and the Impending Elections
  (May 2009)

4
Recession Adv. countries
2008 Financial Crisis
Financialization 1970-2007
Return of the postponed?
Sub-Prime Housing Bubble
Stock Market Bubble
The Long Downturn 1970s ?
Debt bubble
Emerging Mkts bubble
Reverse Capital Flows
5
2008 A Historical Turning Point

• The Financial and the Real
• Financialization postpones long downturn effects
  on
• Decelerating First World Economies thro increased
  capital inflows creating Anglo-Saxon capitalism
• Increasing state role thro neoliberal-ization of
  (predominantly financial) markets
• Declining US hegemony through growth competition
  thro A-S model with IW and growth repression in
  IIW and IIIE
• End of all three as focus shifts to production,
  state and Rise of the Rest

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2008s effects on the Rest

• Immediate loss of trade and finance
• But long run gains in policy options, new terms
  of trade?
• Financial contagion greatest in most liberalized
  markets
• Least liberalised most successful demonstration
  effect
• Rise of rest not merely artifact of US deficits
• Decrease in hot money potentially good
• Recession does curtail Western Markets of even
  less liberalized economies
• Need to
• Focus on internal and/or southern markets
• Re-coup capabilities for economic governance

7
The Indian Experience...

• Big Bourgeoisie at Independence (not Kalecki-an
  intermediate regime)
• Significant 1st stage ISI in 1930s
• Economic Nationalism formative
• Growth inevitably largely endogenous (derided as
  trade pessimism, autarky, inward-looking,
  socialism)
• Growth pattern of high Inequality Poverty
• Since mid-1980s enthusiasm for Neo-liberalism,
  globalization and the US among educated opinion
• But 2 major steps up in growth (circa 1950 and
  1980) do not coincide with freer markets of
  globalization

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(No Transcript)
9
... The Indian Experience.

• IMF/WB involvement absolutely large ,
  proportionally insignificant
• Internal pressures for economic liberalization
  (my date 1969)
• Until recently state leads growth first, direct
  state investment, later demand boost through
  state salaries and spending
• Reserve Bank of India (RBI)s conservative no
  hyperinflation
• RBI not formally independent but respected (until
  recent Min Fin electorally motivated takeover of
  liquidity injection oversight from RBI)
• Nationalization of major banks 1969.
• Capital Controls slowly and incompletely lifted
• Foreign Financial Institutions presence limited

10
Sectoral GFCF at Current Prices 1980-2007 (Rs
Crore)
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1947-69Planned Development

• Nationalists opposed Drain, Deindustrialization,
  Colonial not a national state
• Planned National Development includes bourgeoisie
  (Bombay Plan etc.)
• Import Substitution Industrialisation (ISI)
  Agrarian Transition
• Egalitarian agrarian reforms Higher
  productivity, surpluses, market
• Planned industrial development Large Pub sector
  diversified industrial structure
  self-reliance
• Quasi Marxist strategy undermined by agrarian
  power
• Crisis of planning in Late 1960s Green
  Revolution
• Achievements derided but actually higher Hindu
  rate of growth diversified industrial structure,
  institutional development

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Fetters and Planning

• Corresponding to each state of development, there
  tends to grow a certain economic and social
  stratification which is conducive to the
  conservation of gains from the use of known
  techniques. Such stratification has a part to
  play in social progress. But beyond a point, it
  hampers innovation and change, and its very
  strength becomes a source of weakness. For
  development to proceed further, a re-adaptation
  of social institutions and social relationships
  thus becomes necessary The problem, therefore,
  is not only of merely rechanneling economic
  activity within the existing framework that
  framework itself had to be remodelled.
• p. 7.

13
The Hindu Rate of Growth in Historical Perspective
14
1969-84Under-cover Liberalization

• Prima facie increase in statism nationalization
  of Banks, industrial control increased,
  substantial 2nd state ISI, anti-smuggling, FERA,
  MRTP, etc.
• Underlying trend point elsewhere
• labour repression,
• Green and White Revolutions,
• state intervention pro-capitalist by default
• Inflation middle-class political unrest
  emergency 1977 Janata Government
• Self-constraining inequitous growth process set
  pattern
• Agrarian bourgeoisie ? Urban and industrial
  investment ? provincial propertied class ?
  seamless Indian capitalist class

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1984-92Domestic Liberalization

• From late 1970s onwards hesitant but then
  accelerating decontrol various reports (Desai,
  1969, Jha, 1981) critical of state intervention
• 1984 Rajiv Gandhi domestic liberalization with
  limited international opening
• Accompanied by usual rhetoric about free market
  and export-led growth though exports remain
  stagnant
• Growth rate picks up circa 1980 not after 1991,
  as neoliberals have it
• Consumer durables-led boom (mainly vehicles)
• Energy/import intensity real cause of Balance of
  Payments crisis

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Cargo Cult?Exports and Imports as GDP