In autumn 2008 the capitalist strategists still talked about the potential for a ‘decoupling’ of the ’emerging markets’ (China, India, Brazil etc.) from the global crisis. It was clear from the start that the ‘decoupling’ was a myth, a wishful thinking.
The Impact of the Slump 2008
The impact was immediate. The main stock-market index (Sensex) fell by more than 50 percent during the year 2008, from 20,800 in January 2008 to under 10,000 in mid-October. The mass-sales of shares and securities held by foreign investors and the subsequent massive US Dollars outflow resulted in the largest fall of the foreign exchange reserves in eight years. While in July 2008 the reserves stood still at 300 billion US Dollars, by November 2008 they had plunged down to 258 billion. The withdrawal of capital from the Rupee caused a massive devaluation of the currency. Early 2008 the Rupee stood at 39.25 US Dollars, by end of November 2008 it had depreciated to 50.5 US Dollars. In October 2008 for the first time in more than a decade the manufacturing output of the Indian industry declined.
The National and Global Bail-Out 2009
In 2009, the state in India induced money into the markets, which postponed the impact of the crisis and shifted its focus to the question of state debts. “We had to inject Rs 80,000 crores as stimulus package to overcome the crisis, which helped arrest further deterioration of the Indian economy,” finance minister Mukherjee said in April 2010. These policies, like in the rest of the world, increased state debts. India’s public debt was at 78 per cent of GDP in 2008/09 and increased to 82 per cent in 2010. Despite the global stimulus packages, foreign direct investment inflows into India dipped 5.16 per cent to USD 25.89 billion in 2009-10. India’s exports declined 4.7 per cent to USD 176.5 billion in 2009-10. Export forms a fair chunk of the GDP (1988: 6 per cent / 2008: around 20 per cent). The fiscal deficit increased by 25 per cent in 2009 to 2010.
The Currency War and Inflation in 2010
The low interest rate policies in the Global North – meaning: the attempt by the states to provide cheap money as investment incentive to corporations – sent off a wave of ‘hot money’ to the emerging markets, where investors hoped to be able to find a profitable short-term investment. This caused inflation rates to rise dramatically. Indian inflation hit double digits in May 2010, the highest in any G20 nation. The Indian reserve bank had to raise interest rates again and again in order to curb inflation, which forced a lot of companies to lend money on the international markets, increasing the (corporate) foreign debts – between March 2009 and March 2010 external debts increased by 16.5 per cent to 261.5 billion USD. The ‘fluctuating’ character of investments revealed itself when the state debt crisis in Greece sent shocks through the global markets in May 2010 – 20 billion USD short-term invested capital was extracted from ‘Indian’ markets within a couple of months.
The Indo-Euro Crisis in 2011
The Euro-crisis – the running out of the stimulating impact of state credits induced in 2009 and the hitting home of state debts – reached India in the last quarter of 2011 and fortified the general trend towards a further downturn. Between August and December 2011 the Indian Sensex (main stock market) lost 18 per cent. In November 2011 alone, 600 million USD ‘foreign short-term investment’ was withdrawn from the Indian securities market. The ‘hot money’ of 2010 cooled down – in summer 2011, when the Euro crisis threatened to trigger a second global slump worse than the one in late 2008, the ‘hot money’ streamed back from the ‘insecure’ emerging markets to the USD markets. This caused massive depreciations of local currencies. Between July and December 2011, the price of the Indian Rupee fell by more than 16 percent, to a rate Rs 53.80 to the USD – a record low.
The persistent fall of the rupee has also added to the burden on the trade deficit, which in October 2011 widened to a 17-year high of $19.6bn. The total trade deficit for 2011/12 is expected to widen sharply to between $155 billion and $160 billion from $104.4 billion a year ago. As a consequence of the weak Rupee the petrol prices are supposed to rise by 1 Rs per litre from January 2012 – around 80 per cent of the petrol in India has to be imported. In 2010 the government changed the legal framework for oil price regulations, an act to make ‘the people’ pay for the state’s ‘corporate stimulation’ – since then petrol prices have been hiked several times. Higher petrol prices will keep inflation up. India’s headline inflation has been above 9 per cent during 2011 despite 13 rate increases since March 2010 that have lifted the repo rate to a three-year high of 8.5 per cent from 4.75 per cent. The high interest rates choke investments.
The government lowered the GDP growth forecast for 2011 to below 7 per cent, compared to 8.5 per cent in 2010. In October 2011 industrial output fell for the first time in more than two years. Capital goods production, considered a barometer of investment sentiment in the country, fell 25.5 per cent. In 2011 car sales in India posted the steepest fall in nearly 11 years.
Consequently the state has trouble meeting its crisis budget. Net tax revenues have grown just 7.3 per cent in the first seven months of 2011-12, while state expenditure has jumped by about 10 per cent during the same period. Some economists are now projecting that the fiscal deficit by the end of the financial year could be as high as 5.7 per cent of GDP. The state had calculated to re-finance its debts by selling state assets, but the economic slump foiled the plan: only one public sector undertaking (PSU) hit the capital market in 2011 raising only Rs 1,145 crore, the plan had aimed at several ‘privatisations’ which were supposed to raise Rs 40,000 crore.
Is a re-make of the 1991 foreign debt default possible? The Indian (state) banks have 314 billion USD of foreign currency reserves. Outstanding foreign debts, which will have to be repaid within a year, stand at about half of this amount. The recent deal with Japan of a 15 billion USD currency swap can be seen as a sign that liquidity problems are severe. With the value of the Rupee declining, it will become costlier to repay the debts.
The figures above confirm that there is no ‘decoupling’, but rather a very immediate relation between the ‘continental markets’. Austerity measures or monetary policies in the north almost immediately impact the situation in the ’emerging markets’. It also shows that despite a seemingly huge ‘internal market’ – 800 million people living in India’s semi-rural areas – this ‘internal market’ has little weight once it comes to the question of capitalist boom or demise. The regime in India will have to follow its counterparts in the north and push through with ‘unpopular’ decisions.
The back-and-forth concerning the question whether foreign direct investment should be allowed in retail sector (allowing Walmart, Tesco, Carrefour etc. to open supermarkets directly) can be seen as a symbol of the dilemma the regime is facing: economically the regime is in dire need for further capital inflows, socially it does not want a head-on confrontation with a social strata (medium and small traders) which quantitatively and qualitatively might prove to be the last stable ‘popular’ barrier between the regime and the rural and urban proletarian poor.
The ‘political expression’ of this strata, in the form of the anti-corruption movement Hazare’s, although ‘annoying’, manages to channel wider ‘popular discontent’ and re-focus it on the political-parliamentary arena. They thereby provide an invaluable service of social counter-insurgency for the ruling class, which weights as heavy as the pressure from the ‘economic’ figures above. Economic and social figures, which, let’s be honest, resemble scarily the figurations of recently toppled regimes in northern Africa (food price developments, foreign debts, graduate unemployment, historical parallels of IMF enforced adjustments etc.). The decision to post-pone the opening of the retail market has to be seen as a state of economic-political paralysis of the regime, facing the social abyss. Let’s help the regime with a little push.