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Nos. 44-46 Table of Contents Note to Readers Introduction I. Economics as Mechanics II. How Capitalism Emerged in Europe III. Colonial Rule: Setting the Pattern IV. India's Runaway 'Growth' 1. Missing Links 2. The External Stimulus and Its Implications 3. Private Corporate Sector-Led Growth and Exclusion 4. The Condition of the People 5. The Agrarian Impasse and Its Implications V. Unlocking the Productive Potential of the Entire Labour Force
Introduction Indias economy has seen rapid growth since 2003-04. The scale of this growth was not anticipated by many of the critics of the neoliberal economic policies.1 In particular the following features were unexpected: (i) GDP growth has been sustained for five years at high levels, and is widely predicted to continue at high rates well into the future. (ii) Rapid growth is no longer restricted, as in the past, to the services sector, but has extended to manufacturing. (iii) There have been unprecedented increases in the rates of savings and investment. Among the proponents of the current economic policies, these developments seem to prove that India is on its way to join the developed world, indeed, even become an economic superpower. At the same time, the proponents of the present policies have been unable to explain why, amid this extraordinary boom, the following have persisted: (i) Mass malnutrition worse than that of sub-Saharan Africa prevails, with average calorie and protein consumption actually declining over the period of liberalisation. (ii) The growth and quality of employment have been abysmal. (iii) Real wages are stagnant/declining in the economy as a whole. (iv) Agricultural investment and growth are stagnating/retrogressing. (v) There is a profound crisis of the small peasantry (highlighted by their suicides).
Thus the present conjuncture poses more sharply than ever the question of the pattern of growth, and the meaning of development. In this issue of Aspects, we wish to explore this question. In doing so, we must take account of the conflicting approaches to understanding the economy.
Notes:
1. Aspects too has been guilty of wasting energy questioning the levels of GDP growth, a red herring, rather than focusing on the nature of the growth. (back)
The current economic policies are based on the current orthodoxy reigning among economists worldwide. This view, called neoclassical economics, argues that growth will automatically spread from the current boom sectors to the backward sectors, and that all that needs to be done is to accelerate growth. The Finance Minister concluded his 2007-08 Budget speech thus: our human and gender development indices are low not because of high growth but because growth is not high enough.... As Dr. Muhammad Yunus, the Nobel laureate, said, Faster growth rate is essential for faster reduction in poverty. There is no other trick to it. How is growth to be accelerated? The neoclassical economists claim that Government intervention is harmful. According to them, all that needs to be done is to ensure that nothing interferes with the incentives for individual gain. The focus should shift, then, from macro-economics to the micro-economic environment, the level at which individuals make decisions. Thus, in the name of accelerating growth, the supporters of this approach demand that various subsidies, supports, regulations and restrictions concerning the backward sectors be removed. For example, they demand that, in agriculture, official procurement of crops be ended, restrictions on private corporate procurement and contract agriculture be removed, ceilings on land holdings be removed, new seed technology be allowed entry and patent protection be strengthened for it, restrictions on agricultural import and export be removed, restrictions on domestic trade in agricultural commodities be removed, restrictions on commodities futures markets be scrapped, and so on. For industry, they demand that labour laws providing security to workers be relaxed, and that the remaining sectors under the public
sector be privatised or opened up to private capital. Restraints on the entry of foreign capital into various sectors should be removed. Tariffs on imports should be reduced to very low levels. Such subsidies as remain, hidden or open, should be scrapped. All such measures, they say, stifle the incentives for individuals the incentives for investors to invest, for workers to work harder or learn new skills, for farmers to switch to growing crops for which there is demand, and for the under-employed to shift to sectors in which employment is growing. Once all restraints are removed, they say, capital will flow to low-wage regions and under-invested sectors, and raise the productivity of labour in them, thus improving incomes of the people in those regions/sectors. In fact, they celebrate the growth that has been taking place in the last few years as proof of their theories. The Economic Survey 200708 proclaims: Faster economic growth is... translating into more inclusive growth, both in terms of employment generation and poverty reduction. Whenever there is a sign that GDP growth is flagging, they demand that yet more neo-liberal reforms be carried out along the above lines. Neoclassical theory Behind such arguments lies a certain conception of the economy and society. In the seventeenth century Isaac Newton discovered the laws of the action of forces upon material bodies, known as classical mechanics.1 Just as Newtons mechanics spell out the laws of motion of objects, the reigning school of economics, known as neoclassical economics, imitates Newtonian mechanics to analyze human society.2 It sees each participant in the economy each worker, peasant, big landowner, capitalist, and so on as an independent actor. Each one acts on his/her own, striving to get the greatest possible satisfaction (termed his/her utility). Neoclassical theory claims human beings actions throughout history have been (and will continue to be) driven by individual, selfish gain. Yet the sum of their strivings, pushing and
pulling in different directions, brings about an equilibrium, a state of balance, which yields the greatest sum of utility possible in the given conditions. (What exactly utility is, and how, if at all, it is to be compared, measured or added up, was never meaningfully defined.) In this conception, every participant in the economy is, in a sense, a trader, and the forces driving the actions of all these individuals are fundamentally similar. It portrays each individual worker, land-owner, industrialist as possessing some resource: land, capital, or labour, which it calls factors of production. The worker hires out his labour; the landowner rents out his land; the capitalist gives the use of his capital. Each does so for a price (the price of hiring labour is wages; the price of hiring land is rent; and the price of hiring capital is the rate of interest). That price, according to the reigning theory, is determined by supply and demand in each market. According to the proportions in which these three factors land, labour, and capital are available in a particular society, their prices automaticallyand simultaneouslysettle at some equilibrium which makes full use of all of them. Where capital is scarce and labour plentiful, interest rates would be high and wages low. In that case, it would be attractive to capitalists to employ less capital-intensive methods of production, that is, hire workers rather than buy machines. If any of the three resources lay idle, its price would fall till it was fully absorbed. Full employment is a central assumption of this theory. However, say the neoclassicals, if prices are kept artificially low or high by outside intervention, all factors might not be employed fully: the gears become sticky, as it were, preventing the machine of the economy from running smoothly. For example, if wages were prevented from falling to equilibrium level by minimum wage laws, or by trade union action, capitalists would tend to buy machines that replace labour; and so some labour looking for work would remain unemployed. Thus unemployment, according to this theory, is the result of wages not being allowed to sink low enough.3
Price plays the key role in this theory. Price not only signals how much
to use of each factor of production, but also how much to produce of each commodity. Every consumer, whether worker, peasant, capitalist, or landlord, whatever his/her income, is driven by the same considerations. Each consumer chooses what to spend on in a way that gives him/her the greatest possible satisfaction (utility). This sends the required signal to the producer on what and how much to produce. When demand for a commodity grows, some consumers would be willing to pay more for it, and its price would rise. The higher price makes it profitable for producers to produce more of the good, and its production rises (with the increased supply, the price then falls, and further adjustments take place up and down till it settles at some equilibrium level). Again, any interference with market forces is counter-productive: If the price of a good is kept artificially low (eg by price controls), it would deter capitalists from investing in producing that good, and hence it would remain in short supply.
This theory assumes that producers can shift their production seamlessly from one commodity to another. Each producer can adjust the quantity he/she produces. Each consumer too can shift his/her purchases from a given product to a substitute. No producer or consumer (or group of producers/consumers) can directly influence prices, since there is a large number of producers and consumers (if you price your goods higher than others, you will lose customers; if you price them lower, so will others, and you will not gain customers, but lose profits). Only when individuals increase or decrease their production or purchases do they affect prices, indirectly, by changing supply or demand. That is to say, perfect competition is assumed by the theory. Nor could there ever be a shortage of demand in relation to production. The orthodox theory assumes that all that is left after consumption goes directly or indirectly toward investment. So the whole of income creates demand for what is produced.
The beauty of this theory is that, given the different quantities of land, capital and labour individuals possess, and their demand for different commodities, the laws of supply and demand work to deliver full employment and the maximum utility possible for consumers in the circumstances automatically. If a change takes place in the conditions for example, if more land, or labour, or capital, becomes available the system automatically adjusts its mix of the three to absorb fully all of them. Like a pendulum which, when pushed, rocks back and forth but ultimately comes to rest on its own, the equilibrium, when disturbed, gets restored automatically. Some aspects of classical theory appeal to us because they correspond to commonsense. We all know that if something becomes scarce its price goes up. And we also easily accept the notion that people are fundamentally motivated by the desire for individual gain, and that this cannot be changed; after all, is that not what we see around us every day? The obvious fact is that this theory serves to justify capitalism. It provides a justification for profit and rent these are presented as just the prices of hiring capital and land. (The problem of where the capitalists capital come from is not answered; it is assumed that he was thrifty, and saved it up.) And at any rate, whatever the distribution of wealth, unfettered capitalism is shown to maximise the use of resources of society; it maximises utility (whatever that means) in society; every participant in the economy makes individual, voluntary decisions about how much to work, how to spend, and so on. Innate, immutable human nature (which, in its view, is greedy and selfish) is not suppressed, but harnessed; no section is oppressed, but a harmony of interests is automatically achieved. Any attempt to run counter to this system harms the interest of the whole of society.
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With the onset of the Great Depression in 1929, certain economists (the best known among whom was Keynes) began questioning parts of the above theory. They showed how the system does not automatically create demand for the whole of production, or bring about an equilibrium in which there is full employment; rather, it spontaneously tends to break down. When for some reason capitalists do not anticipate enough demand in relation to production, they stop investing, and cut production. That in turn lowers demand further, making investment even more unattractive to them. And so the economy sinks to a level at which there is large unemployment and unused capacity. The insight of these economists undermined the entire structure of neoclassical economics. For now it was clear prices dont play the magic balancing role accorded to them in neoclassical theory. Contemporary capitalists dont keep cutting prices of their products till they are able to sell all they can produce, irrespective of whether or not they make a profit. Instead, they prefer to cut production. Capitalists who are already saddled with excess capacity dont borrow money, even if the price of capital (i.e. the rate of interest) falls to very low levels. Moreover, a fall in the price of labour (the general level of wages), far from making investment more attractive to capitalists, reduces aggregate demand, which makes investment less attractive, dragging the economy down further. All this would suggest that in the present era the underlying tendency of capitalist economies is towards stagnation and failure to realize productive potential. However, the situation of underdeveloped economies, like Indias, has a further dimension. The manner in which production is organised the social and economic order under which production takes place itself does not permit even an approach to full employment.4
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The Indian economy has been deregulated over the last 15 years, labour laws have been given a de facto burial, and various sectors have been opened up to, or handed over to, private capital. If the prevailing economic theory were correct, one ought to have witnessed a more even spread of income growth and a steady rise in employment. Instead, the gap between the growth rates of different regions has grown; the gap between the growth rates of different sectors of the economy too has grown; the rate of employment growth has slowed, resulting in massive growth of unemployment; and employment in the organised sector, where wages and conditions meet some minimum norms, is actually falling. Inequality in incomes and wealth has grown. And the bulk of the workforce remains in agriculture, the sector that is stagnant or retrogressing. Thus the currently prevailing economic theory does not help us to understand the current state of affairs boom on one side, and destitution and retrogression on the other. So this orthodox theory cannot help us change it, either. In fact, such change is the main concern of the vast majority of people. The view of classical political economy Before the rise of neoclassical economics in the late 19th century, the dominant stream was what is now called classical political economy. Its founders, stalwarts of the capitalist system, are now cited in textbooks for those aspects of their thinking which were later adopted by neoclassical economics. Adam Smith is cited for his belief that each person had a propensity to trade; that in the pursuit of selfish gain each person would advance the common good, as if led by an invisible hand; and that State intervention could only harm the natural harmony of social interests that arose from free competition. David Ricardo is cited for his theory showing how trade between two countries benefited both. However, important questions explored by them were cast aside by neoclassical economics.
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In the work of Smith and Ricardo, the participants in the economy do not appear as independent, atomistic actors, but as classes workers, landowners, capitalists characterised by their roles in relation to production. They tried to work out the principles by which income created in the course of production is distributed among these three classes in the form of wages, rent, and profit. The discipline of political economy developed in a period of rapid change the era of the rise of capitalism in Europe. Thus Smith and Ricardo were interested to find the driving force of development. They located it in the production of a surplus over the consumption of the labourer, and the accumulation of the surplus in the form of the growth of productive capacity. In the course of their investigations, it emerged that the interests of the three classes (workers, landowners, capitalists) are in conflict: The surplus over the consumption of the labourers is distributed among the other two classes (i.e., landowners and capitalists). Of course, in their view, the capitalists share of the surplus, i.e., profit, benefits society: for it goes toward accumulation, expanding the productive capacity unlike the landlords share. Smith termed various sections other than labourers and capitalists as unproductive (he included among unproductive labourers the king, the armed forces, churchmen and lawyers). Ricardo was concerned with preventing a rise in either wages or rents, which would lead to a decline in profit and thus development. Thus, in their approach, struggle between classes played an important role in shaping economic processes. Marx developed aspects from Smith and Ricardos thought, while rejecting other aspects, in creating a comprehensive and consistent analytic system. His work marks the culmination of classical political economy. At the same time, he introduced aspects which went far beyond its frame.5
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Historical approach Neoclassical theory sees the economy as a snapshot in which supply and demand in all markets simultaneously and instantly arrive at equilibrium. Each successive change is a new snapshot, a new equilibrium. By contrast, Marx viewed the economy and society as a process. This approach allowed him to analyse development in the economy. It follows from this approach that in order to understand the present, we must trace the process back that is, look at history. In Marxs historical approach, classes in each society are stamped by their specific history. It is the character and strength of the contending classes that not only shape society itself, but determine that societys place in the world economy. Only armed with this approach can we understand the vast diversities of the world: how some countries developed first, and colonised or otherwise dominated others; or how some countries today have developed so highly, while the bulk of them, containing the vast majority of the worlds population, remain underdeveloped and in misery. The source of wealth Neoclassical theory, as we saw, begins and ends with the market. Classical political economy too gave great importance to the role of market forces and the operation of supply and demand; but its account centred on the sphere of production. Drawing on the analysis of his predecessors, but taking it further, Marx showed that the whole of civilized society rests on the surplus created by the working people in the course of production. The manner in which that surplus is generated, the level of the surplus, how it is distributed among different classes, how much of the surplus is accumulated (i.e., re-
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invested), and in what manner it is accumulated these give us the key to understanding the economy. Crucially, classical political economy located the source of societys wealth in human beings interaction with nature in the form of labour.6 The wealth of a nation is measured by how productive its labour is, and what proportion of its labour force is employed in productive labour. Whereas in the currently dominant theory, the wealth of a nation is measured by how much capital a country has accumulated and production per unit of capital. By this measure, a nation grows wealthy by carrying out large investments and using the latest technology, even if this involves keeping a large proportion of its labour force unemployed or under-employed or engaged in work that does not yield it a subsistence. The approach of classical political economy implies that such a deployment of the labour force is a suppression of the nations potential wealth. In neoclassical theory, markets operate on their own; State intervention is represented only as a harmful phenomenon, preventing the markets from clearing and arriving at equilibrium.7 And the use of coercion is missing in its account; indeed, it claims there is no need of coercion in a free market; in a free market, by definition, exchange must be of equivalents. By contrast, Marx and his followers pointed out that under exploitative societies before capitalism, such as slave society and feudalism, extra-economic coercion was a necessary part of surplus extraction: slaves and serfs toiled for the ruling classes of their times because laws, traditions and armed force compelled them to do so. No doubt, in capitalist society it is principally economic coercion that compels the worker to labour (he/she needs to labour in order to eat); but the use of organised force, and its highest form, the State, is essential to the operation of the social and economic order. If the workers set their hands on the capitalists private property (which after all has been created by the workers labour), they face the armed force of the State. (Indeed, they face it even when trying to
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reduce the extent of surplus-extraction by fighting for higher wages and better conditions of labour for example, the use of police against striking workers.) All this can be understood in the Marxist framework. And even the States own economic activity its taxes, its expenditures and subsidies, its production of goods and services can be understood with the class analysis of Marxism. Study of the social-economic formation Finally, neoclassical theory does not take note of the distinct social and economic relations within different societies; it merely talks of advanced and backward economies. In its view, the difference between the two is merely quantitative: the backward economy has less capital (for example, less industry). As the backward economy develops, it will eventually reach the condition of the advanced economies today. They believe that contact (in the form of free trade and investment) between the advanced and backward economies accelerates the development of the latter, benefiting both in the process. The increasing wealth of one economy (or of a class within an economy) will eventually percolate to the rest; there is no relation between the wealth of some and the poverty of the rest. Evidently, in such a framework it is impossible to understand why some countries took the trouble to colonise others, and why, centuries later, the gulf between the colonisers and the once-colonised persists in various forms. By contrast, Marx uncovered the character of different stages of social development, and further looked at the specific historical path each society has travelled. Later Marxists extended this to understand the phenomena of colonialism and its development into latter-day imperialism. With the Marxist approach, we can understand how social institutions like caste, race, and gender developed, and in turn their role in shaping particular patterns of economic development. In sum, Marxism does not make a separation between economics and sociology: both are aspects of study of the social-economic formation.
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Amid the confusing processes we are now witnessing in the Indian economy, the neoclassical approach cannot explain the strange pattern of growth we are witnessing today. We all the more need the class, surplus-based and historical approach of political economy. Indeed, in order to understand the historical process by which the Indian economy has developed, we need to look, by contrast, at the process by which capitalism developed in Europe. Though this is a lengthy detour, the reason for our taking it will become evident when we return to look at Indian society.
Notes:
1. It was later superseded by quantum mechanics. (back) 2. See Krishna Bharadwaj, On Some Questions of Method in the Analysis of Social Change, 1980. (back) 3. As wages sink, not only would capitalists hire more workers, but some workers would no longer find wages attractive compensation for the pain of working, and would voluntarily choose leisure over work. (back) 4. What the government terms the unemployment rate in India refers only to open unemployment. A much larger number of persons are under-employed they do not have enough work, and whatever they occupy themselves with does not generate enough for their subsistence. And a large number of persons suffer disguised unemployment: they are not counted as unemployed because they are not looking for jobs, though they would be looking if they had any hope of getting a job. These two categories are larger than the official figure of unemployed. The total of the three categories unemployed, underemployed, and disguised unemployed is larger than the figure of those we can properly consider employed. (back) 5. We are not describing here Marxs entire system, merely a few aspects relevant for this article. (back)
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6. Nature is the primary source of all instruments and subjects of labour, that which labour works with and upon. (back) 7. For example, by enacting a minimum wage law which prevents wages from sinking low enough to be attractive to capitalists to start hiring. (back)
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What capitalism is, and how it emerged in Europe over the course of several centuries, is a vast and complex subject. But in order to contrast that process with what occurred in India, it is useful to mention a few aspects. (A warning: we have not presented developments in chronological order, since the aim is to describe processes.) Some readers might find this a tedious digression, and others might find it over-simplified. Nevertheless, our reason for mentioning these aspects will become clear later, as we describe the pattern of development in India. Class struggle within feudal society propelled social development Capitalism in Europe was preceded by feudalism. Under feudalism, land was overwhelmingly the main means of production. Land was owned by feudal lords, and a large number of peasants bound to the land worked it in small farms. There was also a smaller number of artisans, who owned their meagre means of production. The surplus product of these peasants and artisans, the direct producers, was extracted by law, custom and force by feudal lords. The form in which the surplus was extracted ranged, depending on place and time, from serfdom with forced labour to the point of mere payment of tribute (in kind or cash). Secure in a stagnant society, these lords had little interest in improving technique and expanding output, which grew, at best, very slowly. The basic conflict in feudal society, the conflict that propelled society forward, was between these direct producers and the landowning lords. In order to maintain their class power, the feudal lords tried to maximise the rent they extracted from the peasants.1 The peasants struggled in various ways to end, or at least curtail, this extraction of the surplus, sometimes by open revolt, sometimes by fleeing the land.
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In the course of these struggles many peasants were able to relax the stranglehold of the lords, to keep some surplus for themselves, and to improve and extend their cultivation. Additionally some artisans and merchants became wealthy enough to buy land in their own right, breaking the lords monopoly on land ownership. And so another process began: some producers improved their production faster than others, and were able to accumulate some capital within the petty mode of production itself; and over time there developed a class of relatively prosperous farmers alongside impoverished peasants. This polarisation helped lay the basis for the wage labour that would be needed under capitalism. Growth of merchant capital; decline of the old order Over the centuries of feudal society, as the surplus grew to some extent, trade also grew. Around that trade grew towns where merchants enjoyed some political power. These merchants chafed under certain feudal restrictions and irrationalities. Since trade suffered under the multiple authorities and taxes of various feudal lords, it was in the interest of the merchants to promote a strong central nation-state, as developed from the 15th century.2 Yet the merchants were hardly an anti-feudal force: they fed off the declining feudal order and prospered under it, enjoying official monopolies and high margins. Merchant capital did not lead to industrial capital through its own development. Nevertheless, the money power of the towns well-to-do, the relative political freedom of the towns, and the contact with ideas from distant lands (such as the vibrant Arab civilizations), helped germinate far-reaching changes in religious doctrines and philosophy, mathematics and science. On the one hand religious movements, known as the Protestant Reformation, arose against the authority of the Catholic Church (which, located in Rome, was itself a great feudal landlord throughout Europe, irksome to rising nation-states like England). Even more radical was the revolution in mathematics, science
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and philosophy brought about by Francis Bacon, Copernicus, Galileo, Descartes, Leibniz and Newton: now men learnt that the universe did not revolve around the earth, rather the earth revolved around the sun, and the laws governing its motion were discovered and propagated. The associated change in the world-view of the intelligentsia has been termed the Enlightenment: in the new ideology, the force of human Reason now unseated established authority, such as the Church and the King. The State itself was now no longer seen as God-given, but the product of Man, a social contract among men for their benefit. That implied that if the State were not functioning for their benefit, it was justified to overthrow it and replace it with a new one. While the broad masses of people, who bore the burden of the feudal order on their backs, had neither the education nor the opportunity to study all these theories, elements of such thought filtered down to them. When the bourgeoisie seized power from the feudal class, it was generally a violent affair in which the bourgeoisie needed the help of the masses, and so the masses were stirred up with slogans of liberation. Thus it was that the British waged a civil war and eventually chopped off the head of their King in 1649; and the French in 1789 began a far more profound revolution, not only decapitating their royalty but sweeping away feudalism much more comprehensively. The French revolution declared liberty, equality, fraternity as its motto. The creation of the working class, the rise of capitalism However, the bourgeoisie used the struggle of the masses against the feudal order not to put the masses in power, but in order to seize power for themselves. With the rise of capitalism the fate of the labouring poor was to be dispossessed, and have nothing to live by but by selling their power to labour. In England, as forward-looking landlords saw money to be made in farming in the new commercial way, they got around the feudal restrictions which prevented land changing hands, and ousted their numerous tenants, hiring a much smaller
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number of landless labourers as wage labour. Moreover, small holders in economic distress could be got to sell their land cheap. And, eager to supply the growing market for wool, budding agricultural capitalists seized and enclosed the once-common lands of the village as their private pasture for their sheep, impoverishing and uprooting local peasants. These terrible upheavals were essential to the growth of industrial capitalism: First, the improved methods of agriculture introduced on consolidated, larger farms by the profit-oriented landowners multiplied output and made it possible to feed a much larger workforce outside agriculture; secondly, the huge numbers of peasants thus ousted from agriculture added greatly to the workforce available for manufacturing goods. Under feudalism, most household requirements shoes, clothes, tools, furniture were made at home. A limited number of goods were produced for the market by artisans/craftsmen employing, say, two or three men, working with their own tools and raw materials. But as trade grew, merchants, seeking to increase production, began supplying materials and purchasing the finished goods from the craftsmen; the latter still owned their own tools, but they largely lost their independence and were now working for the merchant. However, what definitively marked the emergence of capitalism was not simply production for the market, but the system in which all the means of production the tools/machines, the raw materials, and the location belonged to the capitalist,3 and the labourer had nothing to sell but his/her own labour power; labour power had itself become a commodity bought and sold on the market. Feudalism had needed the use of custom, law and force to extract the surplus from the producers, who possessed plots of land, or artisans tools/equipment, but under capitalism it was no longer necessary to rely on such noneconomic methods. The worker had the choice of working for the capitalist or starving. Surplus extraction now was carried out by the impersonal laws of the market.
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The new capitalists demanded, and got, the abolition of monopolies and privileges in trade and industry on which merchant capital had fattened under feudalism, and thus established free competition at home. Primitive accumulation; the protection and acquiring of markets Setting up capitalist enterprises would require considerable investments; where did the initial sums come from? The religious sects promoted by the capitalists, such as Puritanism, preached that capital was accumulated by virtuous thrift (and some latter-day neoclassical economists preach much the same; they call the return on capital, for example, the reward for waiting). But in fact the initial capital was got largely by various types of plunder and forced labour. We have already mentioned the measures which ousted and destituted the peasants. Add to this the plunder of the territories overseas, the slave trade, and the use of slave labour in the colonies all justified by the development of a racist ideology and backed by the European state powers. Marx described one aspect of what he called the primitive (or primary) accumulation of capital in a famous passage: The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of blackskins, signalise the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief moments of primitive accumulation.4 England, for example, generated huge trade deficits with its colonies (that is, it imported more than it exported to them), and in effect gave nothing to the colonies in exchange; it could do this only because it exercised military and extra-economic power over them. These amounted to giant, unrequited transfers. Even taking only Englands unrequited trade deficits with the West Indies and India, total investment in England was raised by between two-thirds to over four-
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fifths by these transfers during 1770-1820 the very period of the Industrial Revolution in England.5 Apart from the initial capital, capitalists also needed to be assured of a market. While the new capitalists established free competition at home, they were happy to use State intervention against external competition. Once again the nation-state came in handy to capitalism. Large imports of cotton textiles from India not only threatened the market of English woollens manufacturers, but showed how profitable manufacture of cotton textiles in England could be if only it could protect itself against imports of superior Indian cloth. And so, at the start of the 18th century, England passed laws banning imports of cotton goods, and even the wearing of such imported goods. Meanwhile, with the help of its military might, it opened up foreign markets. Not until the mid-19th century, when Britain was overwhelmingly the leading industrial power worldwide, did it dismantle protection and begin to champion free trade till it faced new challengers by the end of the century, whereupon it returned to protectionism. Industrial Revolution While productive forces developed to some extent before the bourgeois seizure of power (with the 17th century Civil War in England, or the French Revolution beginning in 1789), that seizure of power preceded the really dramatic development of productive forces. In England, (i) the creation of a large uprooted labour force (assuring capitalists a steady supply of workers at low wages even as production grew); (ii) the pillage from the colonies and the grabbing of the commons; and (iii) the protection of the domestic market and the forcible prising open of foreign markets, combined to create conditions for new technology. It was in the 18th century, and particularly after 1760, that the famous series of innovations began that are now termed the Industrial Revolution: the flying shuttle that increased the speed of weaving and the widths of cloths, and the
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powerloom that increased that speed further; the spinning jenny, water frame and mule that successively increased the speed and quality of spinning; and the steam engine, that was first applied in a cotton mill in 1785 and to a railroad in 1804. The factory system reorganized work, with much greater division of labour, supervision of work and specialization of function. Where land was overwhelmingly the main means of production under feudalism, under capitalism, the main means of production became industry. Massive expansions followed in the coal, iron and railroad industries, and thereafter in every sphere: for the first time in human history, the shackles were taken off the productive power of human societies, which henceforth became capable of the constant, rapid and up to the present limitless multiplication of men, goods, and services.6 So abnormal was the rate of change as radically to transform mens ideas about society from a more or less static conception of a world where from generation to generation men were destined to remain in the station in life to which they had been appointed at birth, and where departure from tradition was contrary to nature, into a conception of progress as a way of life and of continual improvement as the normal state of any healthy society.7 However, it is mistaken to credit this transformation merely to new technology: industrial inventions are social products in the sense that... the questions that are posed to the inventors mind as well as the materials for his projects are shaped by the social and economic circumstances and needs of the time. Some innovations had to wait to be implemented till economic and social circumstances were favourable: for example, the smelting of iron with coal was probably discovered in 1620, but it was only a century later that it was put to successful use.8 Nor was innovation mainly a matter of scientific genius: the practical problem of smelting with coal... was solved before the chemistry of metallic compounds was properly understood. The problems these men of industry and invention put to themselves were formulated, not a priori, but out of the fullness of their own experience.... [T]he qualities and experience needed for successful
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synthesis and application are often those of an industrial organizer rather than of a laboratory worker.9 Innovation now became a compulsion: Each capitalist was driven to keep increasing the productivity of labour, failing which he would be swallowed by his competitors. Capital not merely reproduces itself, but it must do so on an expanded scale. The purpose of production under capitalism is to accumulate more capital. (Marx further foresaw that in this process the large number of small firms would be reduced to a handful by the action of the inherent laws of capitalistic production itself, by the centralisation of capital. One capitalist always kills many.10 But monopoly capital only emerged after an extended period of unfettered competition.) Capitalists of humble origin; competitive markets; technology easy to diffuse While the wealthy merchants financed these new enterprises, they were not the main agents of this change: the personnel which captained the new factory industry and took the initiative in its expansion was largely of humble origin, coming from the ranks of former master craftsmen or yeomen farmers with a small capital which they increased by going into partnership with more substantial merchants. They brought with them the rough vigour and the boundless ambition of the small rural bourgeoisie; and they were more inclined than those who had spent their time in the counting-house or the market to be aware of the detail of the production process, and so to be alive to the possibilities of the new technique and the successful handling of it. Among the new men were master clock-makers, hatters, shoemakers and weavers, as well as farmers and tradesmen.11 At this stage of capitalisms growth, the number of capitalist enterprises was large, and each firm was relatively small, so markets were competitive. The technological advances were still at a level where they could be easily diffused, and could not be monopolized by a
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few firms; these advances were soon spread to the Continent despite attempts by Britain to the contrary by export of British machinery and British skilled workers. Belgium, France, Germany and the U.S. all developed with the help of British know-how.12 Massive shift of workforce to industry One might imagine that, since innovations like the spinning-jenny and the powerloom meant that the same amount of production could be carried out with far fewer workers, they would reduce the size of the working class. No doubt, such innovations ensured the existence of an army of unemployed workers, so that wages did not rise to the point where they hurt profits. But they gave so great a boost to investment in a whole range of industries (machinery, coal, iron) within Britain that they resulted in a net increase in the demand for labour. Further, the development of railroads attracted enormous investment. Thus, in countries which underwent capitalist transformation, not only did industrial output soon dwarf agricultural output in national income, but the industrial workforce soon overtook the agricultural workforce. This shift took place first in England, where the share of the workforce in agriculture sank to 14 per cent by 1871, compared to 55 per cent employed in industry and trade.13 Although the pace of the shift was slower in other countries, a similar process was a necessary part of capitalist development in all such countries. With urbanization, various items of mass consumption such as clothing and footwear were now no longer made at home, but had to be bought by workers. The sheer increase in the industrial workforce meant that the purchasing power of the masses multiplied. Thus industry gained a growing internal market for such goods, limited though it was by the fact that the workers were paid such low wages. The growth of capitalist agriculture too was sustained by demand from the growing number of workers absorbed in industry.
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In order to compete with one another, capitalists required the constant cheapening of production, one element of which was the cheapening of raw materials. Capitalism brought this about by industrialising agriculture. The differences between the productivity of workers in the two major sectors of the economy, industry and agriculture, tended to narrow in this process. Establishment of capitalist social values The change in the class structure naturally resulted in a change in the dominant social values which are always the values of the ruling class. The hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist.14 As we mentioned, the social background of many first-generation men of capital was humble, and, while they bought up titles and ranks with their new money, they advertised the fact that they were self-made men. The bureaucracy now was thrown open to a wider social section: the French Revolution instituted this by a system of national examinations. In Japan, where till 1868 only the samurai (military nobility) could bear arms or hold public office, all such privileges were abolished, all classes could be conscripted into the army, universal public education was instituted, and education and ability were made the basis for recruitment to public office. Hobsbawm indeed claims that The crucial achievement of the two revolutions (the Industrial Revolution and the French Revolution) was thus that they opened careers to talent, or at any rate to energy, shrewdness, hard work, and greed. Not all careers, and not to the top rungs of the ladder, except perhaps in the USA. And yet, how extraordinary were the opportunities, how remote from the nineteenth century the static hierarchical ideal of the past!15 The new ideology of course helped justify the miserable condition of the labouring masses, for evidently in such an open system poverty could only be the result of laziness or stupidity. However, while the capitalist class had defeated the old classes and established its supremacy in the economic, political and ideological
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spheres, it had created a new class, vast and growing the proletariat. At the time of the Revolution of 1649 or the Revolution of 1789 the proletariat in England and in France was not yet formed as a class, and was not conscious of its existence as a class; workers followed the lead of the bourgeoisie without advancing independent demands. Yet within a short time after the French Revolution, workers began organising on class demands, both economic and political. The Chartist movement of 1838-48 in Britain was the first political organisation of the working class; in 1864 the first International Working Mens Association was born; and 1871 witnessed the first, albeit short-lived, state power of the working class, the Paris Commune. The publication of Marx and Engels Communist Manifesto in 1848, followed by Marxs Capital in 1867, provided what eventually became the dominant ideological basis for working class organisation. Thus capitalist society was marked by the sharp contention between two great classes, the capitalists and the working class. The above description is intended only to highlight a few aspects of the development of capitalism in order to bring out certain crucial linkages within it (they are not listed in chronological order; indeed they overlap): (i) Class struggle, accumulation and class polarisation: The class struggle of peasants helped restrict feudal extractions; this helped the accumulation of some capital within the petty mode of production, and this accumulation helped the development of productive forces; this development increased the polarisation of the peasantry into different classes. (ii) Ousting of peasantry, creation of working class and a mass market: A large labour force was ousted from agriculture by agricultural capitalists; the new methods then adopted in agriculture led to an increase in agricultural productivity, generating a surplus to feed the growing industrial workforce, and cheapening the raw materials needed by industry. Meanwhile the labour ousted from agriculture was substantially absorbed in capitalist industry; this
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increased the purchasing power of the masses and created a domestic market for mass consumption goods. (iii) Creation of a machine-building industry, increased productivity displacing workers, yet growing working class: The Industrial Revolution and the development of factory production led to the development of an industry producing machinery, coal, iron, and railroads. Since these heavy industries, particularly the machinebuilding industries, developed within the same country as the light industries, the size of the working class as a whole continued to grow despite labour productivity increases in the light industries i.e., workers displaced by productivity increases in light industry got absorbed in the heavy industries. Industry emerged as the main means of production in the economy. It had the dominant share not only of the national income but also, crucially, of the workforce. (iv) Development of the nation-state as protector and capturer of markets: The development of the nation-state was spurred by the growing internal integration of the economy of a region. In turn, it promoted that integration. Both rise of the nation-state and the integration of its economy fueled the rise of national allegiance and national sentiment. Commercial interests stood to benefit, as the new State power worked actively to protect the domestic market and seize foreign markets. (v) Competitive capitalism, diffusion of technology, and the rise of monopoly: When competitive capitalism developed in Britain, technological innovation progressed at relatively elementary level (without a specialized research and development division). Thus in this phase it was relatively easy to diffuse technology to other firms and other countries. Monopoly capital emerged only after and through an extended phase of competitive capitalism. (vi) Ascendancy of different classes and their world-views: As the feudal order declined and new ideas germinated challenging established authority, the ground was prepared, at the ideological
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level, for the sharpening contradiction between the bourgeoisie and the feudal order. Society passed generally through violent mass upheavals before bourgeois hegemony could be securely established. It is through these upheavals that feudal consciousness and feudal allegiances declined and a bourgeois democratic consciousness was given birth. Triumphant, the capitalist class stamped society with its new social values. However, the same social developments also led to the formation and rise of the industrial proletariat. This class had the potential for conscious contention with the capitalist class and the capacity to advance its own world-view. The above are not separate strings. They are intertwined, interacting with one another. They do not represent simple chains of causation, but rather the links between the various developments. This was the classical pattern established in Britain; the course was not identical in any of the countries that industrialised thereafter. Upto the late 19th century, the later the entrant, the greater the advantage it had of being able to import the technology and to complete the process of industrialisation relatively fast; but, generally, the more it had to rely more on State intervention and subsidies to do so. The forced pace created certain strains and weakness of bourgeois democratic consciousness in countries such as West Germany and Japan. As the phase of competitive capitalism receded and was transformed into monopoly capitalism, this path of diffusion of capitalism was more or less closed to new entrants. India, under colonial rule, did not merely traverse a different specific path to capitalist development: rather, while individual elements of development here resembled the development of capitalism in the capitalist countries, crucial linkages were damaged or broken in a way that Indian society and its economy were stunted and deformed. We need to keep in mind the linkages mentioned above as we look at the processes imposed by colonial rule in India.
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Notes:
1. This characterisation of feudalism is based on articles by Maurice Dobb and Rodney Hilton in The Transition from Feudalism to Capitalism, ed. Rodney Hilton, 1976. (back) 2. The rise of the nation-state, and the development of popular allegiance not to a feudal lord, but to the nation, over the long term helped to undermine feudalism and to establish bourgeois hegemony over society. (back) 3. Such establishments first came up on the basis of manual labour, improving handicraft technology with the division of labour (the manufactory); this paved the way for the emergence of the factory, which replaced the artisans tools with the machine. (back) 4. Capital, vol. I, p. 751. (back) 5. Utsa Patnaik, The free lunch: transfers from the tropical colonies and their role in capital formation in Britain during the industrial revolution, in Jomo K.S., ed. Globalization under Hegemony: The Changing World Economy,2006. (back) 6. E.J. Hobsbawm, The Age of Revolution, 1789-1848, p. 45. (back) 7. Maurice Dobb, Studies in the Development of Capitalism, p. 256. (back) 8. Dobb, pp. 268, 270. (back) 9. Dobb, p. 269. (back) 10. Capital, vol. I, p. 788. (back) 11. Dobb, p. 278. (back) 12. A section of the ruling class of Japan had witnessed the subjugation of China by western imperialism and apprehended a similar fate for their own country. Violating feudal restrictions, they organized a non-samurai army (including peasants and outcastes) to overthrow the existing rulers in 1868 and bring about Japans social and economic modernization. The new regime the restoration of the Meiji Emperor promptly imported equipment and skilled workers from the Netherlands, England, France, Italy and other European countries, and set about systematically absorbing the imported know-how. Contrary to the pattern in Europe, it gave first priority to the heavy industries, particularly for military reasons, and only once it was firmly established in these did it move on to develop the light industries such as textiles; this was possible only because the State itself built the core industries with its own revenues. Japan was the last country that was able to
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perform this transformation before the rise of monopoly capital by the end of the 19th century. (back) 13. Michel Beaud, A History of Capitalism, 1500-2000, p. 97. (back) 14. Marx, Poverty of Philosophy, ch. 2. (back) 15. Hobsbawm, op. cit., p. 226. (back)
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I. Colonial Rule: Setting the Pattern of Distortion, Disarticulation, Exclusion1 India was no exception to the laws of historical development. Before colonial rule, the feudal structure of Indian society was in the process of being undermined. Production for the market formed a large segment of the economy (since land revenue was collected in cash or sold for cash); domestic and foreign trade grew, and merchant capital flourished, with some merchants acquiring fabulous wealth; a sophisticated financial system developed, geared to the needs of commerce; and the urban sector expanded, in which a high proportion of the population was employed in industrial/craft production. New elements began to appear instances of private property in land (whereby land could be bought and sold like any commodity); the emergence of cultivation performed with hired labour; the setting up of some manufacture and mining enterprises worked with hired labour. Most importantly, in response to the increasing extraction of rent, there arose stirrings, revolts and movements of the peasantry and artisans of various regions, sometimes clothed as religious movements, sometimes led by local chieftains. These dealt blows to the Mughal Empire and accelerated its collapse.2 However, the new elements were still weak, scattered or sporadic; they were far from achieving the scale or cohesion to lead a social revolution. Whatever the reasons for the delay in the emergence of such a revolution (for which the tenacious caste system and the selfsufficiency of the village economy must have had some share of responsibility), it was forestalled by the arrival of colonial rule. Transfer of surplus from agriculture to the imperialist metropolis The effect of colonial rule can be glimpsed in two figures. In 1700 Indias share of world Gross Domestic Product was roughly the same as
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that of all of Europe both were around 23 per cent; by 1952 Indias share was four per cent and Europes 30 per cent. Indias share of world manufacturing fell from almost one-fourth in 1750 to less than one-fiftieth in 1900.3 The new British rulers took the already excessive land revenue levels of their predecessors as a starting point, and increased them steeply by re-assessment and more efficient collection. Common to the two main systems of land revenue they introduced zamindari and ryotwari was the drive to maximise revenue. Thus even in the latter in which, theoretically, the cultivator directly confronted the State parasitic classes developed rights over the surplus, since the cultivator was forced to borrow to make revenue payments. Since land could now be bought and sold, it became a commodity but of a peculiar type, subject to a heavy rent/revenue. This huge drain from agriculture was also a drain from the country itself, because the land revenue formed the main component of British drain from India. Agriculture, thus drained of its surplus, retrogressed: while agricultural technique remained virtually frozen at the levels of Mughal rule, per capita foodgrains output declined considerably. Peasants had no surplus to invest in maintaining productivity, let alone improving it. In one sense colonial rule superficially resembled classical capitalist development in that it forced an increase in the share of production for exchange; but this condition has aptly been termed a deformed generalised commodity production.4 The peasant now had to pay the (hiked) revenue in cash and that too before the harvest, when he was short of cash; this rendered him dependent on merchants and moneylenders. The merchants and the moneylenders had a stake in encouraging tradeable crops rather than subsistence farming, and brought about a shift in cropping patterns. The decline of subsistence crops and the expansion of cash crops served the process of transferring surplus from the colony to the imperialist metropolis: (i) these crops could be exported; and (ii) India was paid for these exports out of the taxes levied by the British rulers in India itself in other words, India in effect received nothing in return. (Some writers
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talk of export markets being opened up for India with British rule. This is similar to someone robbing one, and then paying for ones goods with the money he has robbed.) Since the replacement of subsistence crops with cash crops depressed the consumption of the poor peasantry, it can be said that the surpluses were transferred out of the very subsistence of the poor peasantry. The spread of cash crops went hand in hand with the spread of hunger. The late 19th century witnessed a series of devastating famines and epidemics that wiped out millions; even after that malnutrition persisted. Before British rule, a portion of the land revenues used to return to the region from which they arose, through the nobilitys purchases of goods from artisans; now, with the ousting of the earlier nobility and their replacement by the British, this source of demand for artisans goods vanished. The British imposed internal tariffs on Indian textiles and heavy tariffs or outright bans on their import into Britain, whereas British textiles were imported into India at low tariffs. India was converted from a leading manufacturer and exporter of textiles to a massive importer of them. This destroyed the section of the Indian textile industry producing fine fabrics for consumption by the earlier feudal elite. The industrial cities of the earlier period Agra, Dacca, Surat, Patna, and others declined in economic activity and population. Large-scale unemployment was thus a direct and enduring product of colonial rule. The share of industry in the workforce fell, as did its share in national income. The share of agriculture in workforce and national income grew, not thanks to any development in agriculture, but because of the shrinkage of industry. Deindustrialisation, pressure on the land, helplessness before feudal forces The artisans and workers once employed in the textile industry now had to fall back on agriculture. Under Mughal rule there was a great abundance of land, which allowed cultivators to cultivate only the more fertile land, and to cultivate only half their land in a given year, thus
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maintaining its fertility. However, as deindustrialisation took place under British rule, and ruined weavers fell back on the land as the only means of livelihood, land became scarce. W.W. Hunter wrote in 1893: In Bengal there was in the last century more cultivated land than there were husbandmen to till it. The landlords at that time were competing for tenants.... A hundred years of British rule has reversed the ratio.... It is [now] the husbandmen who have to compete with each other for land.5 This destruction of indigenous industry, and the retrogression of agriculture combined with its commercialisation, led to a new kind of distorted feudalism, or semi-feudalism. The peasants lack of any alternative to cultivation rendered them helpless before the landlords, merchants and usurers, who found it easy to increase their extractions to the point where they took away not only the surplus, but even a part of what was needed for the peasant to subsist and to reproduce the conditions in which he/she could produce again. The lack of alternative employment also meant that many landless or very small peasants preferred to tie themselves in voluntary bondage to a feudal lord with the guarantee of some sort of subsistence. Finally, it meant that, however poor the returns from cultivation, however marginal the plot of land, the peasant would cling onto it tenaciously as the only defence against complete destitution. At the same time, those trying to eke out a living in all sorts of petty trade proliferated, since there were no barriers to entry in this field. Thus the share of the services sector in employment grew, even as the income of those so-called selfemployed in such petty activities remained even lower than the income of those involved in production. No doubt the peasant was now linked with national and international markets, but these did not operate to stimulate greater production. First, the large revenue demanded of the peasant left him little or no surplus to re-invest. Secondly, taking advantage of the peasants need for cash before sowing, the moneylender-trader was able to tie the peasant in debt and force him to sell the crop to him at a depressed price. Thirdly, between these traders and the international market
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intervened large wholesale merchants, banks in India, and businesses and banks in the imperialist countries. Any rise in international prices could easily be retained by those links in the chain closer to the outlets in the imperialist countries; even if the peasant had information of improved prices, he lacked holding power to extract better terms in such a situation. (Thus any improvement in terms of trade would not accrue largely to the peasant, but to these other links in the chain, including foreign ones.) On the other hand, any fall in international prices could be passed back down the chain to the peasant, who, as we mentioned earlier, lacked alternative employment, and was trapped in debt to the moneylender-trader, and hence had no option but to continue to produce on worse terms. The usurping of the forests Before British rule, the forests were to a large extent under the control of the tribals, for whom they were the source of their food, fuel, fodder, housing materials, raw materials for household needs, and medicines, and therefore an indispensable part of their social and religious life. Lacking ploughs and draught animals, the tribals practised shift and burn cultivation on forest land. They also earned income from the sale of wood and forest products to other communities. From around the 1860s, the British began to monopolise the forests then two-fifths of the countrys area by a series of measures which classified most forests as reserved or protected, set up a separate forest administration, placed restrictions on the tribals use of the forests and banned shifting cultivation (the typical method of agriculture among tribals, who could not afford ploughs and cattle), and extracted large tax revenues. At the same time, the British plundered the forests for timber and fuel, setting in motion the process of deforestation which continues to date. Attempts by tribals to reassert their rights over the forest were sparking-points for numerous violent tribal revolts against the Raj.
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The processes of imperialist penetration and trade in forest products brought to the forest areas non-tribal moneylenders and merchants, who soon alienated tribal lands on a large scale, and thus joined the government as a target of tribal revolt. The debt-ridden tribals were routinely forced to perform veth, or forced labour, on the fields of the usurers. Frequently the same usurer-landowners were also appointed forest contractors (given timber contracts) by the forest officials. In the later years of the Raj, the rich mineral resources of the tribal regions began to be developed, again by the displacement and exclusion of the tribals (even as a few would be hired as coolie labour). In the absence of any other source of livelihood, the tribals, now deemed encroachers in their own land, nevertheless clung on to the forests and forest plots; as such they remained available for exploitation by sundry forest officials, merchants, and usurers. There are a number of important common property resources (CPRs) apart from the forests: grazing lands, village commons, ponds, tanks, streams and rivers. Before British rule, a large part of the countrys natural resources were under the control of local communities, and were freely available to the rural population. As the British rulers extended State control over these resources, community control and management declined, and a dwindling share of erstwhile common property resources and forests remained available to the villagers. As a result, today, in almost all parts of the country, villagers have a legal right of access only on some specific categories of land and water resources. The process of extending State control over the common resources, which began with the declaration of reserved and protected forests in the closing years of the 19th century, has essentially been that of exclusion of villagers access to common resources by law. As a result, the systems of community management gradually disintegrated and are now virtually extinct. Today, in almost all parts of the country, the villagers have legal right of access only on some specific categories of land like pasture and grazing lands and village forests, which are under the jurisdiction of the village or village panchayat. All other
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categories of land not under private ownership like barren and uncultivable land, culturable waste, land put to nonagricultural uses and forests belong to State Revenue department or Forest department. Nevertheless, the rural population, particularly the poor, depend greatly on the goods and services available from these categories of land. Besides, though only those resources are treated as CPRs on which no individual has exclusive property rights, there are systems of customary rights which support traditional practices, such as gleaning or grazing of cattle in the fields after harvest, which represent common rights on private property in certain situations.6 Introduction employment of modern industry displacement without re-
Machine industry was introduced into India in the 1850s (in cotton and jute textiles), and grew faster from the late 19th century onward. It came, that is to say, after the destruction of much of native industry, but, unlike in Europe, it did not grow out of native industry. Whether the firms were owned by British entrepreneurs or (as in western India) by Indian ones, the machinery for these firms was imported, largely from Britain. As modern industry proceeded, it kept displacing more workers from traditional industry, such as the surviving spinners and handloom weavers who produced cloth for the lower end of the market (the higher end of the market was catered to for a long time by imports). The modern sugar and iron industries similarly ousted traditional producers. In Europe too traditional industry in consumer goods had been ousted by machine industry, which developed through continuous increases in productivity; but in India, thanks to continuous imports of machinery, employment was not created within India itself in a machine-making industry and other heavy industries as could have made up for the loss of employment in consumer goods industries. Thus the net effect on employment was negative. Given the nature of the transition to modern industry there was a large gap between the technology embodied in the imported machines
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and the know-how existing in India; indeed, even for running the machinery the mills imported technicians from Lancashire. Since the market was limited for many products, and the minimum size of the firms based on imported technology was large, Indian industry did not pass through a phase dominated by a large number of small firms competing for markets (with the winners growing into monopolies). Instead, a few firms between them could exercise monopoly control at the very outset, and did not face competitive pressure to reduce production costs and prices. As this practice proved profitable, technological dependence was continuously reproduced. The typical Indian industrial house did not develop through an extended period of unfettered competition through which capital was centralised in the technological leader. Rather, it was born as a monopoly house, closely linked to government policy, contracts, and subsidies, and with ties to feudal sections, for example for the supply of raw materials. The background of the entrepreneurs was finance (including usury) and trade, and they excelled in financial, mercantile and speculative operations (often devoting to them as much attention as to their industrial operations). These firms, known as managing agencies, controlled a number of firms, often in disparate industries. A survey of Indian monopoly houses from the 1930s till the late 1970s remarked that monopoly capital in India bears a closer family resemblance to pre-industrial monopolies than to contemporary monopoly capitalism in the west.7 Railways and irrigation: infrastructure for imperialist penetration, not development In his 1853 article on The Future Results of British Rule in India, Marx anticipated that when you have once introduced machinery into the locomotion of a country, which possesses iron and coals, you are unable to withhold it from its fabrication. You cannot maintain a net of railways over an
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immense country without introducing all those industrial processes necessary to meet the immediate and current wants of railway locomotion, and out of which there must grow the application of machinery to those branches of industry not immediately connected with the railways. The railway system will therefore become in India truly the forerunner of modern industry.... Modern industry, resulting from the railway system, will dissolve the hereditary divisions of labour, upon which rest the Indian castes, those decisive impediments to Indian progress and Indian power. Later, however, as he saw the actual process of colonial rule in Asia (in contrast to the history of colonial rule in North America), Marx revised his views: in an 1881 letter he referred to the railways as useless to the Hindus (i.e., the Indians), and one of the means for the British to carry on a bleeding process with a vengeance!8 And Lenin later remarked that imperialism had converted the building of railways, which seems to be a simple, natural, democratic, cultural and civilizing enterprise, into an instrument for oppressing a thousand million people (in the colonies and semicolonies), that is, more than half the population of the globe inhabiting the dependent countries.9 Indeed only a minute portion of the railway equipment was manufactured in India, and so the entire multiplier effect of investment in the railways did not take place in India. On the contrary, the dividends on (inflated) British private investment in the railways were one of the major elements of the drain from India. Moreover, the route alignments and rate structures of the railways made it cheaper to transport goods from the ports to the interior and back rather than between points in the interior. Thus the railways increased the relative distances between places in the hinterland, since very often the only connections they now had between themselves passed through the ports. The railway revolution thus turned the third world economies inside out and enormously increased the intensity of dominion of advanced capitalist countries over them.10 They helped convert India into a supplier of raw materials and
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foodgrains for Europe and its colonies, and open up the countrys market to imported goods. The actual effect of such growth of exchange, in a situation where productive forces and associated purchasing power stagnated, can be glimpsed in the export of, and increased domestic speculation in, foodgrain in the midst of famines: As argued sarcastically by an administrator from a native state, ...In former famines only disjointed local areas were affected.... Now railways made it possible that we were starved to death as well as our neighbours. Even an indigenous grain dealer of Calcutta was ready to concede that ...Prices rose throughout India during this famine largely due to operation of railways. In the previous (1878) famine there was little movement of crops due to good harvests in some parts. In this famine bad harvest is also equally spread. Spread of telegraphs, according to the grain dealer, ...helped merchants in keeping up prices throughout India.11 When the new rulers finally made investments in irrigation, they did so only in select pockets, on strictly commercial considerations, and in a distorting fashion. Their purpose was to stimulate high-value, intensively cropped, commercial crops in order to increase government revenues. In the United Provinces (U.P.), with the introduction of canal irrigation under British rule, merchants who, as we noted earlier, had an interest in promoting crops in which they could trade extended cultivation loans on the condition that the peasants grow sugarcane. The costs of sugarcane cultivation were heavy, and the peasants remained trapped in debt thereafter, often losing their land in the process. Since sugarcane displaced the crops peasants grew for their own consumption, the peasants now had to buy their subsistence needs from the market, and at higher prices (since the crops were now scarcer). Moreover, the pattern of canal development caused environmental damage, rendering large lands infertile.12 Thus the development of commercialised, high-value agriculture did not result in accumulation within agriculture, but pauperised the poorer peasantry and drained surpluses into the hands of non-agricultural classes.
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The process of spread of other cash crops, such as cotton or jute, was linked to a similar pattern of dependence on, and eventual nearbondage to, merchant-moneylenders. While physical coercion was used to impose certain crops such as indigo and poppy on the peasants, in most cases commercialisation was forced upon sections of peasants through the process described above, that is, through seemingly free exchange. At times the forced nature of this commercialisation showed up in the fact that, to the extent the peasants position improved (say, when he actually got the benefit of better prices), he would withdraw from the market i.e., reduce the share of output sold.13 Stunted industrialization Because of the pauperisation of the peasantry and the small size of the working class and the middle class largely as a consequence of British rule the market for manufactured goods remained very restricted. Given the limited market and the absence of comprehensive tariff protection similar to that enjoyed by Britain before its Industrial Revolution (and for decades thereafter), investors did not find the Indian home market attractive enough to warrant large investments. Rather, speculation, hoarding, usury, and other such unproductive financial activities (for which the colonial economy provided much scope) proved more attractive. Later, tariff protection was introduced selectively by the colonial rulers when Britain was in decline as an imperialist power, and it wanted to protect its market in India against encroachment from other imperialist powers. Thus the Indian sugar industry was protected in order to shut out sugar imports from the Dutch colony of Java; this led to sudden growth of the Indian sugar industry, which in turn led to a sharp rise in demand for sugar machinery from Britain. (The big bourgeoisie did not miss the significance of this experience of government support, and in post-1947 India the ability to manipulate governmental levers was critical to the fortunes of various
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business houses.) By the 1930s multinational corporations (a new phenomenon) were setting up plants in India to take advantage of tariff protection and penetrate the Indian market. These were harbingers of a new phase, in which India would shift from colonial rule by one imperialist country to multilateral dependence on several imperialist countries. Industrial development was stunted, and yet the size of individual firms was relatively large in relation to the market (a scale dictated by the technology imported from advanced capitalist Britain). Industrialisation was thus, inevitably, lumpy and spread unevenly over the country. Till 1914, industry was concentrated in Bombay and Calcutta (apart from Tata Steel in Jamshedpur). While some industry did come up in Ahmedabad, Delhi, Kanpur and some other places in U.P., Coimbatore, Madurai and Madras after World War I, growth remained regionally lopsided. The situation was also markedly dichotomous reflecting the disjunction between agriculture and industry. The portenclave manufacturing centres, like Calcutta, were growing fast even as the hinterland agrarian and traditional industry was deteriorating. On the other hand, regions with relatively prosperous agricultural growth like Punjab had no major industrial centres.14 As late as 1948, the three Presidency-states of Bombay, Madras and Calcutta accounted for 77 per cent of the percentage of industrial workers, 77 per cent of industrial production, 82 per cent of engineering and electrical goods production, and 87 per cent of chemical goods production in the country. The corresponding figures for the minerally rich states of Bihar, Orissa, and M.P. were only 10, 10, 10, and 5 per cent, respectively, showing how little the natural endowments of the region mattered in this respect.15 Distorted and arrested social development By the late 19th century the minimum capital required to set up a competitive industrial enterprise was substantial, and was only available to sections endowed with considerable capital of their own
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and the confidence of the financial community. The big industrial entrepreneurs were almost exclusively drawn from a tiny handful of commercial castes/communities the Gujarati banias, the Marwaris, the Parsis, the Khattris, the Aggarwals, and the Chettiars prominent among them. (Among the Muslims, too, business was dominated by certain trading castes, but they were weaker, and flourished only after the formation of Pakistan.) The big business communities had their roots, and continuing activities, in finance and trade rather than production, and they maintained this separation even after turning to industry. They refrained from carrying out any technological innovation; the more enterprising among them applied their minds to choosing which technology to import. The education system the British set up in India cannot be criticised for not educating the masses, as it was not intended to do so; it was designed to create a class of Indians who would mediate between the colonial rulers and the ruled, as well as facilitate and reduce the expenses of their rule in India. (Macaulay, then a member of the Governor-Generals council, made this clear in the famous Minute he prepared for Bentinck in 1835: I feel with them that it is impossible for us, with our limited means, to attempt to educate the body of the people. We must at present do our best to form a class who may be interpreters between us and the millions whom we govern, a class of persons Indian in blood and colour, but English in tastes, in opinions, in morals and in intellect.) No doubt, as a by-product of this education system, some independent-minded elements got access to European streams of scientific and analytic thought, but this was rare. The university system brought into being a class of professionals and upper white-collar staff which served the needs of colonial rule. Moreover, not only did the entire urban elite and a section of the middle classes learn English, but the Western education system, combined with the fact of British rule, established the intellectual and cultural domination of Europe over India. The urban elite and broader sections under their influence developed a mentality of subservience to all things European, an overpowering taste for European products, a sense
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of shame about their Indianness and a yearning for approval by the white man. Secondary education too was shaped by the goal of entering tertiary education, reinforcing the status of English throughout of the educational system and consigning instruction in the native tongue to a second-class status. The real barrier to the fuller development of the numerous Indian languages was not any dominant Indian language, but the supremacy of English, just as the barrier to the development of the economic life of the various national regions was the imperialistdirected pattern of development. All sorts of reactionary and obscurantist thought, rather than diminishing, spread under the British umbrella. After the revolt of 1857, it was a matter of conscious British policy to ensure communal division: in the words of the 1879 Army Commission, Next to the grand counterpoise of a sufficient European force comes the counterpoise of natives against natives.16 Unlike in the capitalist countries, the system of electoral politics was not introduced through a long process of democratic and working-class struggle; on the contrary it was introduced by the British rulers as part of their effort to associate elite sections with their rule, and to set competing communal elites on one another. However, the impact of these manoeuvres was not restricted to elite sections, but had terrible repercussions among the masses. It was in the late 19th century that communal mobilisations and riots among Hindus and Muslims began making a regular appearance, finding their grim climax in the great massacres of Partition. The caste system, that decisive impediment to Indian progress and Indian power, far from being dissolved by the railways and the appearance of modern industry under British rule, survived in a somewhat modified but hardly weakened form. British administration created certain limited opportunities for members of castes lower in the hierarchy, resulting in a scramble among the various castes for these favours. The earlier Brahmin dominance in government posts and
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social status was challenged to some extent by certain non-Brahmin communities with growing economic and social clout, and important nonBrahmin movements arose in the south. However, while there was a partial reordering of castes within the hierarchy, the institution of hierarchy itself was not threatened, and remained particularly oppressive to those at the bottom of the pile. The British resolutely abstained from interfering with the social prohibitions and economic exclusions suffered by the oppressed castes; indeed, as Ambedkar observed in an address to the All-India Depressed Classes Congress, August 1930: Before the British you were in the loathsome condition due to your untouchability. Has the British Government done anything to remove your untouchability? Before the British you could not draw water from the village. Has the British Government secured you the right to the well? Before the British you could not enter the temple. Can you enter now? Before the British you were denied entry into the police force. Does the British Government admit you in the force? Before the British you were not allowed to serve in the military. Is that career now open to you? Gentlemen, to none of these questions you can give an affirmative answer. Those who have held so much power over the country for such a long time must have done some good. But there is certainly no fundamental improvement in your position. So far as you are concerned, the British Government has accepted the arrangements as it found them and has preserved them faithfully in the manner of the Chinese tailor who, when given an old coat as a pattern, produced with pride an exact replica, rents, patches and all. Your wrongs have remained as open sores and they have not been righted....17 The abundance of land before British rule allowed some caste mobility, yet even under those conditions certain castes were kept landless; with the destruction of native industry and the enormous pressure on the land under colonial rule, there was even less scope for escape from caste oppression. Only an agrarian revolution, with all its political and social implications, would have created scope for a profound churning
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of the caste order; and such a revolution would have upturned the native classes on whom British rule itself was based. Distinct class structure Thus British rule created a class structure in India distinct from that of capitalist Britain. Parasitic classes landlords, traders and usurers maintained sway over the rural areas. There they found ample scope for fattening on parasitic extractions in landownership, usury and trading rather than on expanding productive forces. Their control over multiple markets land, labour, credit, output allowed them to increase extractions beyond the limits possible in any single market (for example, an indebted peasant would be compelled not only to pay interest but to sell his produce or his labour power cheaper to his creditor). The vast majority of producers fell in three groups: landless, very small, and small, who were not in a position to take advantage of market stimuli to accumulate. Though the middle and rich peasants were able to respond to market stimuli, they were unable to concentrate land in their hands, as small producers clung to their holdings, however uneconomic, as their only defence against destitution in conditions where employment in industry was stagnant.18 The big bourgeoisie, composed of big industrial and trading concerns with close ties to foreign capital and feudal forces, prospered under British rule. By contrast, a section of small industrialists grew in numbers, generally restricted to businesses such as cotton gins and presses, rice and oil mills, traditional sugar manufacture, and small powerloom or handloom factories. Some enterprising elements of this class ventured into pharmaceuticals, chemicals, and small engineering workshops. Lacking access to finance, linked too to feudal sections, denied any support from the colonial government, too weak to compete with the monopoly power of the big bourgeoisie, and most importantly hobbled by the meagre markets of poverty-stricken India, they were unable to unleash the necessary ever-expanding circuit of accumulation in industry.
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Colonial rule in India also led to the development of an industrial proletariat associated with modern industry, thus creating the basis, as in Europe, for political organisation with the ultimate aim of the abolition of private property. However, far from emerging as the great majority of society, the proletariat in India remained a small island in a sea of peasants and petty self-employed. Several obstacles stood in the way of its developing class consciousness. As industrial employment stagnated and capitalist concentration of landholding failed to materialise, the workers retained strong ties to their villages and to the land; these ties proved useful for the industrial employers, as they could escape paying the worker a level of wages that would provide for security after retirement, or for the upkeep of the workers family (which would often remain in the village). This set-up allowed for the exploitation of womens labour in reproduction, even more than in capitalist society.19 Further, workers tended to retreat to their villages at the times of strikes and mill closures, thus weakening the fight. Finally, the workers ties to the village imbued him with feudal consciousness, including subservience to social superiors and fatalism. The recruitment of workers, especially of the most unskilled manual labour, often took place in gangs and through contractors with feudal ties, which also helped keep them in line. (Large numbers of Indian workers were despatched as indentured labour to Assam, Ceylon, Fiji, South Africa, the West Indies, and Iraq, often in conditions of semislavery.) A major division emerged between the organised sector workers (which corresponded roughly to the unionised) and the unorganised sector; this division was greatly strengthened in the post1947 period, and the second section was effectively kept beyond the pale of union organisation. In this environment, it is not surprising that reactionary influences, both caste and communal, retained their grip on workers to a large extent. Even after the end of British rule, the Indian big bourgeoisie did not exercise exclusive hegemony over the Indian State. First, they served the interests of imperialism in the new configuration: that is, no longer the interests of a single colonial power but of the multilateral
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domination of the multinational corporations of all the imperialist countries. Secondly, the big bourgeoisie shared hegemony with a variety of feudal forces, who remained (and remain) prominent in the political life of the country, indeed dominating it at the state level. Formally, intermediaries in agriculture (such as the zamindars) were abolished, ceilings were placed on landholdings and tenants were protected from eviction, but in fact only trivial amounts of land were distributed, and landlords took evasive measures to perpetuate their hold. True, in the changed situation a greater share of the surplus could remain with the producers, and agriculture recovered to some extent from its long decline under British rule. However, as long as industrial employment grew at best slowly, the mass of the workforce remained trapped in agriculture, and thus subject to semi-feudal exploitation; agriculture remained trapped in the pattern of surplus extraction and redeployment set by the class structure that emerged under colonialism. Important quantitative changes took place, such as those termed the Green Revolution, but they proved unable to break this mould. Industry, on the other hand, has grown within the frame of (i) the restricted scale and skewed nature of domestic demand (concentrated at the top), (ii) domination by domestic monopoly business houses drawing on its control of State policy, and (iii) the worldwide domination of monopoly capital. These conditions have ruled out the possibility of the Indian bourgeoisie carrying out industrialisation of the type that would generate mass employment. This sketch brings out the distinct historical process which has shaped the socio-economic formation of India today. The various sets of linkages described in the previous chapter, describing classical capitalism, are found here in a broken, distorted form. This helps us understand the nature of the growth taking place today, to which we now turn.
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Notes:
1. As in the preceding chapter, the argument in this chapter is drawn from several wellknown works. Among them (in chronological order) are R.P. Dutt, India Today, 1946, Paul Baran, The Political Economy of Growth, 1957, A.K. Bagchi, Private Investment in India 1900-1939, 1972, and The Political Economy of Underdevelopment, 1982, and S.K. Ghosh, The Indian Big Bourgeoisie: Its Genesis, Growth and Character, 1985, though their perspectives that differ in many important respects. (back) 2. Irfan Habib, Potentialities of Capitalist Development in the Economy of Mughal India, Enquiry, Winter 1971. (back) 3. Angus Maddison, Chinese Economic Performance in the Long Run, 1998, cited in Mike Davis, Late Victorian Holocausts: El Nino Famines and the Making of the Third World, 2001, p. 293; and Mike Davis, op cit., p. 294. (back) 4. Krishna Bharadwaj, op cit, p. 90. (back) 5. Quoted in Utsa Patnaik, Commercialization under Colonial Conditions, The Long Transition: Essays on Political Economy, 1999, p. 260. (back) 6. National Sample Survey (NSS) Report no. 452, Common Property Resources in India. (back) 7. N.K. Chandra, Monopoly Capital, Private Corporate Sector and the Indian Economy, 193176, Economic and Political Weekly, Special Number, August 1979. (back) 8. See S.K. Ghosh, op cit, pp 91-113. (back) 9. V.I. Lenin, Imperialism, the Highest Stage of Capitalism,Preface to the French and German editions (1921). (back) 10. Bagchi, 1982, p. 34. (back) 11. Sunanda Sen, Colonies and the Empire,India 1890-1914, 1992, p. 174. (back) 12. Elizabeth Whitcombe, Agrarian Conditions in Northern India, Vol. I: The United Provinces under British Rule, 1860-1900, 1971. (back) 13. Krishna Bharadwaj, A View on Commercialisation in Indian Agriculture in Accumulation, Exchange and Development: Essays on the Indian Economy, 1994. (back)
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14. Krishna Bharadwaj, Regional Differentiation in India: A Note, EPW, Annual Number, April 1982. (back) 15. Ibid. (back) 16. Quoted in Sumit Sarkar, Modern India, 1885-1947, p. 16. (back) 17. Quoted in R.P. Dutt, op cit, pp. 243-244. (back) 18. Bharadwaj, A View on Commercialisation. (back) 19. That is, the greater the labour of the wife of a male worker in household activities and child-rearing, the less the capitalist needs to pay the worker. Thus it is ultimately the capitalist who exploits the household labour of the woman. Where the family could be maintained not in an urban setting but in semi-feudal agriculture, the wages paid to the labourer could be even further depressed. (back)
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IV. How Distortion, Disarticulation, and Exclusion Are Built into Indias Runaway Growth The Indian economy has no doubt been undergoing very rapid GDP growth for the past few years. However, the nature of this growth is such that it accentuates all the existing distortions in Indias pattern of development, to an extreme. Who can miss the most visible manifestations of these distortions the grotesque gap between the rich and the poor, the metropolises and the countryside, the performance of the stockmarket and that of agriculture? Where views differ is on what, if anything, needs to be done about these disparities. An important section of opinion-makers, well-represented in the media, believe nothing at all need be done: economic growth is generating jobs and prosperity, and poverty is vanishing on its own. All that remains is to do away with the remnants of State intervention in the economy in order to give full latitude to the dynamic private sector. No doubt a section of people suffer in the course of this development, but that is part of the pain that accompanies all progress. Another influential section is less crass, and more sensitive to the turbulent political realities of India even as they share certain fundamental premises with the first section. These humanitarians emphasise the need to make development more inclusive by sharing some of the revenues of the current boom with the disadvantaged through the expansion of public employment schemes, child welfare and nutrition schemes, public expenditure on education, health and other services, measures to uplift the socially disadvantaged, and so on. In the last few years the countrys rulers have picked up on these themes and have included higher social sector allocations in the Eleventh Plan.
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Hardly anyone can argue against larger expenditures on employment schemes, welfare, nutrition, education, and health. If carried out, they would partly reverse the damage done by more than 16 years of fiscal retrenchment and straitjacketing. But this welfarist approach essentially views the process of bettering the lives of people as separate from the process of economic growth; the sphere of distribution divorced from the sphere of production. The only link it makes between the two is that some funds for peoples welfare can be raised thanks to the growth of the economy. The limitations of such a theoretical frame are particularly apparent in a country like ours, where the majority of people are in a pitiable condition. Demanding greater expenditure on peoples basic needs should not divert us from examining the underlying economic processes which generate and reproduce disparities, exclusion, disarticulation and distortion on an ever larger scale. It should not divert us from tracing these processes to basic social relations, in order to change them. The argument in brief In the first chapter we argued that we cannot attach much meaning to the phrase economic growth. Rather, we must investigate the pattern of development to know what it means for people. In order to understand that pattern, we need to approach it historically. Thus we briefly sketched the pattern of capitalist growth in Europe, characterised by a complex of linked developments in the economic and social spheres. We proceeded to describe the distinct course of colonial development of India: how colonialism used its political hold to drain surplus from Indias economy, and for this purpose ruptured important linkages between (and within) sectors of Indias economy. These were the linkages through which in the normal course that is, the course taken by the original capitalist countries capital accumulates, expands itself over and over, and transforms every sector of an economy from within. While certain internal linkages were broken,
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certain external ones were strengthened out of proportion. This prevented accumulation in some sectors, and diverted surplus to others for the purpose of the drain, stunting growth in large sectors and exaggerating it in select sectors. This pattern of development fostered certain native classes whose interests were linked with imperialism, and it is these classes that ascended to power with the departure of the British. Maintaining their grip on political power, these classes perpetuated a pattern of development along the same course, under the tutelage of the developed world, that is, the imperialist countries. There have been many obvious changes since the end of British rule, and these changes appear to have accelerated in the last decade; yet the economy is in crucial ways still shaped by the legacy of colonialism and the continuing hold of imperialism. As a result, the spectacular growth celebrated by the rulers is restricted to islands of the economy; the vast mass of people are trapped in miserable economic conditions and face unbearable social oppression. With this we reach our subject proper, namely, the current pattern of private corporate sector-led growth. First, we sketch the extremely distorted structure of the economy. The bulk of the workforce is crammed into sectors with very low income; a tiny section of the workforce is in the booming sectors. The links between the different sectors (and within the each sector) are missing or weak, allowing islands to flourish in a sea of backwardness and poverty. The gaps between these sectors and sub-sectors are expanding with the growing capital-intensity of the private corporate sector. Secondly, we link the current spell of rapid growth in India to certain developments in the world economy and large inflows of speculative capital from the developed countries. That is, the current high growth is not essentially an internally generated phenomenon, but an externally induced one. Moreover, the increasing financialisation of
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capital in the imperialist economies has brought some changes in the operation of imperialism here. Among the by-products of the changes in the world economy is the emergence of Indian firms as multinationals, powered partly by foreign capital. However, the increased integration of the Indian economy with the highly financialised global economy implies that the impending crisis in the latter, and particularly the long-term downturn in the trajectory of the leading imperialist power, may transmit both shocks and stagnation here. Thirdly, we sketch the pattern of growth of the private sector in this period of boom. We showed how foreign inflows have generated a boom in credit, which, given the structure of the economy, fueled a consumerist surge concentrated among the better-off; this in turn spurred growth in a range of industries catering to this demand. However, this market necessarily remained narrow. Inevitably, the push for rapid growth on such a narrow base took the form of enclaves catering to export or the elite: the software and BPO industries, the SEZs, and infrastructure projects fenced off from the requirements of the rest of economy. Fourthly, we describe a significant element in the economys growth: the large-scale capture of natural resources by the private corporate sector, using the State machinery. As this pattern of resource capture progresses, it results in large-scale destitution of the already depressed sections of the rural population even as it shows up as growth in GDP. Fifthly, we illustrate the manner in which various flourishing industries health care, real estate, organised retail, luxury industries either caused or required economic exclusion of the working people as an essential part of their growth. Sixthly, we show how, while neo-liberalism talks of the need for the State to retreat from economic intervention, it actually requires active State intervention in order to transfer surplus to the private
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corporate sector on a massive scale. Here we talk of various forms of privatisation and the array of subsidies provided to the corporate sector. Seventhly, as a natural outcome of this pattern of growth, extreme inequalities have developed in Indian society. They have progressed to the point where among ruling class circles, and even within international financial institutions, some have raised the alarm, pointing to the threat of grave social disorder. Yet these alarms have little meaning; the present order is quite incapable of moderating inequalities. Finally, we discuss the extraordinary growth of the financial sector within a small enclave of the Indian economy a necessary consequence of integration with global financial markets even as the internal economy remains disarticulated. This integration has yielded foreign investors breathtaking returns; it has also placed the Indian economy on a precipice. The impending troubles of the world economy now will have a more direct impact here. Further, even in the absence of a crash, the demands of foreign speculative capital such as the introduction of capital account convertibility and the transformation of Mumbai into an international financial centre require the further subordination of the productive economy of the vast majority to the financial-speculative island. An alternative path of development must be based on transforming agrarian relations: This would be the prerequisite for accumulation in the vast agrarian sector, and in turn would create scope for generating manifold internal linkages in the economy between sectors, within sectors. Growth rates would not seem so spectacular, but the growth would be meaningful for the people and be more reliable, because based on an internal dynamic. Moreover, the process of transforming agrarian relations would bring to the fore long-suppressed social forces capable of pursuing a development path in favour of the vast mass of people whose productive energies too would be progressively unleashed in this course.
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Despite the clamour about the Indian economic miracle, the fact is that India has been unable to break decisively with its colonial past. Six decades after the transfer of power from British rule, the workforce remains predominantly agrarian. It is revealing that, in the sophisticated academic discussion going on regarding Indias take-off to high growth, the structure of employment (that is, in what sectors the workforce is employed), once a staple of development economics, is hardly mentioned. As we saw in the earlier chapter on the classical process of capitalist development, the shift of economic activity out of agriculture was accompanied by a shift of workforce. In the following section, we will describe how GDP growth of different sectors in India is disconnected from employment growth. As a way of focussing on the peculiar pattern of Indias current economic growth, it is useful to look back at a celebrated paper of 1954 by W. Arthur Lewis1, in which he had described the dual economy in economies such as India. Terming one sector capitalist (broadly identified with industry) and the other sector subsistence (broadly identified with agriculture), he predicted that the capitalist sector would grow, and finally eliminate this dualism. Lewis pointed out that the vast under-employed labour force in agriculture was available to industry at near-subsistence wages. This would make it profitable for capitalists to expand production, and hire more workers, ploughing back their entire profits into further expansion, until the excess labour force in agriculture was fully absorbed. This expansion, however, was contingent on a growth in productivity in agriculture, allowing it to supply increasing quantities of food at prices favourable to industry. For if it did not do so, the growth of demand from the growing number of workers would lead to higher food prices, and as a result higher wages, which in turn would reduce profits; and reduced profits, in Lewiss scheme, would mean lower investment by capitalists, and lower growth.
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However, it is clear that dualism in the economy (whatever be the terms one uses to describe it) has persisted, even hardened. Contrary to Lewiss expectations, the vast under-employed labour force in agriculture, despite being available to industry at subsistence wages, has not been, and is not being, absorbed in industry. This fact stands out particularly starkly against the current boom in corporate profits and investment. Of the population between 15 and 64, less than 60 per cent was usually employed in 2004-05. More than half of Indias workforce remains self-employed, and the share of wage employment in the economy has actually declined during the last decade. Indeed the economy can be mapped as a number of overlapping types of dualism. For example: the non-agricultural sector and agriculture, organised and unorganised workers, large firms and small/household industry, developed and underdeveloped regions, urban and rural development, those with access to formal sector credit and those confined to informal sector credit, dominant and oppressed castes. The disparity between each of these two poles is being reproduced, even widened, by the prevailing economic processes. Thus it makes all the less sense to talk in terms of average incomes or rates of growth. We need to break up each whole into its parts in order to make sense of the reality. Missing links between, and within, sectors Conventionally, the economy is divided into three sectors: agriculture, industry, and services. Industry is divided into manufacturing, mining, and electricity, gas and water supply. Services is divided into trade, hotels, transport and communication; financing, insurance, real estate and business services; and community, social and personal services, with construction sometimes grouped under industry, sometimes under services.
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The purpose of dividing the economy into sectors is to aid analysis; it does not imply that the different sectors develop separately. Rather, one expects the different sectors in an economy to be linked to one another, such that the growth in one sector leads to growth in the others. However, when we divide the Indian economy into different sectors, what strikes us immediately is certain missing links between different sectors. Indeed, certain links are missing even within sectors: For example, manufacturing and services are each composed of sub-sectors that bear little resemblance to one another. Let us look at the sectors one by one. Agriculture: overcrowding and stagnation We saw in an earlier chapter that during the development of capitalism in the original capitalist countries, the decline of agricultures share of GDP was accompanied by a similar decline in its share of the workforce. However, a very different process is taking place in India. Agricultures share of GDP has nearly halved in the past two decades (see Chart 1); but its share of the workforce has fallen much more slowly.2 Its share of the workforce is now 2.7 times its share of the GDP. Thus average income per worker in the non-agricultural sector in 2004-05 is almost five times that in agriculture.
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Moreover, agriculture is not performing the role that Lewis believed it would, namely, supplying increasing quantities of food at lower prices, and thus aiding industrial growth. No doubt agricultures terms of trade in the past decade have been favourable to industry, as Lewis wished, but not because agricultural productivity has improved and cheapened agricultural goods.3 In fact, agricultural production has slowed, to the point where it is falling in per capita terms. The disparity between the growth rates of agriculture and non-agriculture has sharpened. Earlier, one would have expected the poor performance of agriculture to hinder the corporate sectors growth, since agriculture would be unable to supply growing quantities of raw materials for industry and food for growing numbers of industrial workers. However, the present distorted pattern of growth in the corporate sector, heavily dependent on elite consumption and on services sector growth, requires less agricultural raw materials, and less workers.4 And so the
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corporate boom goes on even as agriculture the sector which employs the majority of the workforce languishes. It was once anticipated that with the spread of new technology from the original areas of the Green Revolution (Punjab, Haryana, western U.P., and pockets elsewhere) the rest of India would catch up with the growth in these original Green Revolution (GR) regions, and regional disparities in agriculture would diminish. However, the liberalisation period witnessed disparate trends: in the GR centres, growth slowed; in regions without irrigation but with heavy rainfall, crop prices collapsed and so farm incomes declined despite some production growth; and in dryland regions both production and incomes declined.5 Production in rainfed agriculture, which accounts for 60 per cent of cultivated area, is not only much lower than in the irrigated area, but is more or less stagnant. The bulk of growth has come from expansion of irrigated area and increased production of irrigated land; since the growth of irrigated area has come to a virtual halt under the neoliberal policy of restricting public sector investment, agricultural disparities have widened. Manufacturing: small unorganised sector organised sector workforce dwarfed by
The manufacturing sectors share of GDP has hardly increased in the last two decades (see Chart 2). Similarly, its share of employment has risen only slightly, by 1.5 percentage points. Indeed, its share of employment has hardly changed over the last century. The historical shift in GDP and occupational structure has bypassed manufacturing.
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Even this does not convey the full picture. The term manufacturing conjures up the image of a modern sector with relatively high labour productivity and high wages. However, in fact the manufacturing sector in India is divided into the factory sector and the non-factory sector (the unorganised sector). The factory sector today makes up less than a sixth of manufacturing employment, and less than 2 per cent of total employment. (Further, the number of employees in the factory sector, instead of rising, fell 16 per cent between 1997-98 and 2004-05.) Moreover, the official definition of a factory 10 or more workers using power, or 20 or more workers not using power encompasses a section of small scale industries. Of 129,000 factories existing in 2001-02, 105,000 were in the small scale sector (units with investment in plant and machinery of less than Rs 10 million). Thus medium and big factories what the Ministry of Labour designates as organised sector
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employment accounts for a very small amount of employment indeed, at best 1.5 per cent of total employment. The following diagram helps to conceive of the structure of manufacturing sector employment:
Most of the manufacturing enterprises in the unorganised sector are own account enterprises (OAEs), that is, they have no hired labour; they generally operate out of household premises. Even of those with hired labour, most have less than six workers, and a large proportion operate out of household premises. In short, when we read the term manufacturing workforce in official documents the first picture that should come to our mind is that of a worker making papads or rolling bidis in her own home. The overwhelming bulk of the workforce even in the manufacturing sector is working in primitive conditions, at very low wages, with backward techniques, producing traditional products like matches, bidis, handlooms, food products, and the like. Even as medium and large industry accounts for a fraction of industrial employment, it accounts for around 60 per cent of industrial production. In other words, we have a small island of medium and large industry in which value added is high, surrounded by a sea of small industry in which value addition is low. At the same time, certain medium and large businesses use the unorganised manufacturing sector as a site for surplus extraction: goods such as bidis are manufactured by home-based workers, collected by contractors and sold under wellknown brandnames.
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The share of the services sector6 in GDP has grown dramatically, by 14.4 percentage points, and is fast resembling the share of the services sector in a developed economy. Nevertheless the share of services in employment has only inched up 7.2 percentage points over the same period.
Here, the growth in services share of GDP and the growth in its share of employment are two separate processes. For this sector too is marked by an extreme dualism: on the one hand, a low-income highemployment segment (e.g., petty retail trade), which contributes most of the growth in the sectors employment; and on the other hand a high-income low-employment segment (e.g., the information technology, ITES, financial and real estate services and media sectors), which contributes most of the growth in the sectors income. For example,
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the category finance, insurance, real estate and business services accounts for just 2 per cent of Indias employment, but earns 13.5 per cent of its GDP. The high-income segment has few backward linkages to the rest of the domestic economy; rather, it is linked to export of services and the elite market here. The low-income sector of services is largely what is called refuge employment, under-employment, and does not represent true diversification from agricultural employment. Merely because a peanut vendor is struggling to make ends meet does not mean his struggle should be termed employment. The income of the services sector powered by the high-income sector is growing faster than that of the sectors producing physical commodities. Many services are socially useful, and no economy can exist altogether without a services sector. A developed economy, in which productive forces have advanced so greatly that it is capable of meeting with ease the basic needs of all the people, can sustain at that stage a much larger growth of services. But in an economy where even the minimum needs of the vast masses are not met, the dominance of the services sector amounts to a form of parasitism. It means that (leaving aside the export of services, which earns income that can pay for imports of goods) the services sector claims a larger and larger share of the production of the sectors producing physical commodities. The island of the organised sector and the fall in the share of wages As an economy develops, one would expect the organised sector to replace the unorganised sector in industry and services. However, the overwhelming majority of Indias workforce remains in the unorganised sector, trying somehow to eke out a living. Indeed, the organised sector is able to draw on the unorganised sector as a method of exploiting workers: Since the 1990s, the purchase of finished goods has risen steeply in the overall costs of Indian organised sector firms,
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even as the share of wages has fallen; this indicates the growth of sub-contracting. Further, employers have adopted a systematic policy of replacing permanent staff with contract or temporary workers. Thus within the organised sector, the number of organised workers (i.e., those who enjoy legal rights such as security of employment, minimum wages, sick leave, compensation for work-related injuries, right to organise, etc) has fallen and that of unorganised/informal workers has risen during 1999-2005. The share of organised workers in the total workforce has fallen from an already very low 8.8 per cent to 7.6 per cent during this period.7 The effect of these changes is to reduce the organised sectors wage bill and increase its profits. This underlines the stake of organised sector firms in maintaining overall conditions which generate a large unorganised pool of workers. It is striking that the National Sample Survey (NSS) of 2004-05, during a corporate sector boom, shows a decline in real wages for urban workers (male and female, regular salaried and casual) over the previous Survey (1999-2000),8 which was carried out during an corporate sector slump. Wage levels of workers are declining not only in the unorganised sector but also in the organised sector. While employees in the information technology-related sectors are earning relatively high wages, and managerial and technical staff in organised industry have secured a large increase in wages, real wages for workers in organised industry stagnated or declined. According to one report, The wage share in our organised industrial sector has halved after the 1980s and is now among the lowest in the world.9 Correspondingly, the share of profit in value added in the organised sector is rising. The decline in wages, of course, is not the only contributor to growing profits: decline in interest payments and tax rates, and handsome subsidies provided under various guises by Governments, have boosted profits. The Economist10 puts Indian corporate sector firms average profit margins at 10 per cent, or more than twice the global average; the RBIs sample of private corporate firms shows a rise in the ratio of gross profits to sales from 10.3 per
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cent in 2002-03 to 15.6 per cent in 2006-07, and profits after tax to sales from 4.2 per cent to 10.7 per cent in the same period.11 On the other hand, small, relatively labour-intensive, independent or semi-independent small firms are being crushed under a multiple assault such as the entry of large firms as well as imported goods into their markets (i.e., with the reduction of reservations for small scale industry and with trade liberalisation); the disappearance of already meagre bank credit for the small sector; the appreciation of the rupee with speculative inflows (which makes imported goods cheaper in rupee terms); and the growing poverty of the vast majority of the people, who buy the bulk of cheap, lower-quality goods produced by these firms. No wonder, according to the latest data the number of workers in unorganised manufacturing enterprises actually fell from 37.1 million in 2000-01 to 36.4 million in 2005-06.12 Despite these trends the unorganised sector and within this the tiny/household sector continues to employ the bulk of the nonagricultural workforce. Employment in unorganised non-agriculture has grown by 60 per cent, absorbing over 60 million new workers, since 1993. But this sector has been unable to increase significantly either its capital-labour ratio or labour productivity in other words, it lacks the funds to improve its abysmally backward conditions of production.13 These two disparate private sectors in non-agriculture, the unorganised and organised, now produce about 50 per cent and 25 per cent of all non-agricultural value-added respectively, with 87 per cent and 4 per cent respectively of the non-agricultural workforce.14 Thus the employment growth in the unorganised sector is deceptive: it is largely a form of under-employment. What makes this situation all the more remarkable is that the top section of Indian industry has in recent years displayed the technological resources and entrepreneurial ability to compete in international markets in high-technology fields such as pharmaceuticals, biotechnology, and engineering goods (including automobiles). There are indications that the software industry too,
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once solely a provider of cyber-coolies performing low value-added tasks, is developing the capability to perform more sophisticated, higher value-added work. This corporate sector growth is no doubt increasing opportunities for well-educated urban middle and upper class youth, to the point where white collar salaries have risen sharply and the bureaucracy and armed forces complain of their inability to recruit officer cadre. But this growth is failing to draw the wider economy into its sphere. The advocates of the existing policies paint a rosy picture of Indias future on the basis of what they call its demographic dividend: the ratio of total population to working age population in India is low, and will shrink further in years to come. Hence, they argue, each working person will have to share her/his income with fewer dependents; on a larger scale, the economy will have a smaller number of non-working people to care for. However, this is meaningless if working age population does not get work! The official definition of employment is being engaged in any economic activity, regardless of whether that activity yields a living. But even by this strange criterion, the NSS of 2004-05 reveals that less than two-thirds of the 15-64 age group is employed (and only 60 per cent is usually employed).15 Moreover, 56.5 per cent of the rural population and 43.3 per cent of the urban population is dependent on self-employment, up from 55.4 and 38.8 per cent a decade earlier. The growing share of selfemployment is a sign of the backwardness of the economy, its inability to produce sufficient jobs, and the desperation of the unemployed to eke out a living somehow or the other. Flood of investment, drought of employment The conventional view has long been that the key to Indias development is to increase its rates of savings and investment. According to Lewis, The central problem in the theory of economic development is to understand the process by which a community which
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was previously saving and investing 4 or 5 per cent of its national income or less, converts itself into an economy where voluntary saving is running at about 12 or 15 per cent of national income or more. This is the central problem because the central fact of economic development is rapid capital accumulation (including knowledge and skills with capital). Lewis thus argued that inequality was useful in developing economies, since the rich saved more than the poor. The model of P.C. Mahalanobis, which became the basis for Indias early Plans, differed with Lewiss model in major respects, but it too asserted that increasing the rate of investment was the only fundamental remedy of unemployment in India. Neither of them gave importance to change in agrarian relations, and indeed to the transfer of power to new class forces, as a pre-requisite for development. Indias rates of saving and investment stagnated during the 1990s, but has soared thereafter. Savings rose from 23.5 per cent in 2001-02 to 32.4 per cent in 2005-06 and an estimated 34.7 in 2006-07; investment rose from 24 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06 and an estimated 35.1 per cent in 2006-07.16 Both look set to rise further. Even the figure for 2001-02 is much higher than Lewiss cut-off point. Yet the pattern of employment and the standards of living of the vast majority in India in no way resemble those of a developed economy. The reason is that, while investment in the organised sector grew, so did its capital intensity (that is, the proportion of capital to labour). While the private organised sector grew at an annual rate of 10 per cent after 1993, employment growth was negligible, and in fact fell after 1998. Capital intensity in the organised sector grew so fast that the real capital stock per worker is now three times what it was in 1993. If GDP grows, as projected, at 9 per cent during the Eleventh Plan, it is estimated that the real capital stock in the private corporate sector will increase at about 13-14 per cent per annum during this period; but, assuming past trends of capital-labour ratio continue, the organised sector will absorb at most 2 million more during this five-year period.17 So the dazzling growth of investment is
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largely useless for creating productive employment, which is the core of genuine economic development. Moreover, apart from the higher capital intensity within each sector, there is a growing disproportion in investment between different sectors. The vast majority of the workforce is trapped in sectors which are starved overall of investment: Agriculture accounts for the majority of the workforce and almost one-fifth of GDP, but accounted for only 6 per cent of total investment in 2005-6 (down from 9.5 per cent in 2001-2). Higher savings and investment on the basis of growing inequality How has the dazzling growth of savings and investment been achieved? Under a different social order, investment could be increased by suppressing wasteful consumption, achieving greater efficiency in production, and tapping under-utilised resources (most importantly by mobilising under-employed labour to create capital assets). However, the present rise in savings and investment is based on growing inequality; those flush with surpluses, even after engaging in enormous wasteful consumption, have plenty left over to save and invest. Moreover, the corporate sector has been generously supported by a reduction in effective tax rates18, a reduction in interest rates, and a host of give-aways by the Government. The boom in corporate sector profits has left it flush with funds for investment. It appears that the profits of the corporate sector (public and private) rose from around 9.8 per cent of GDP in 2001-02 to over 21.9 per cent in 2006-07, that is, from Rs 2.24 trillion to over Rs 9 trillion. The private sectors share of total corporate sector profits in 2006-07 was nearly 73 per cent; that is, over Rs 6.57 trillion, or 15.9 per cent of GDP.19 The private corporate sectors profits after tax, according to an RBI study, rose at an average rate of 35.6 per cent a year during 2000-07. Thanks to the boom in profits, the private corporate sectors savings (i.e., the profits it did not distribute to shareholders, but retained for expansion) rose from 4.2 per cent of GDP to 8.1 per cent between
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2002-03 and 2005-06, and is projected by the Economic Advisory Council to rise further to 9 per cent in 2006-07. Its investment rose from 5.8 per cent of GDP to 12.2 per cent during the same period. The boom did not extend to the whole of the private sector: the share of investment by the vast unorganised private sector shrank. The private corporate sectors share of investment rose from 23 to 38 per cent in this period, even as the share of the unorganised sector, which employs the overwhelming bulk of the workforce, fell from 49 to 32 per cent. Regional disparity related to disarticulation between sectors The disparity between fast-developing and backward regions has been accentuated in the liberalisation period. On the one hand there has been little change in the relative position of states in terms of rankings (in per capita income) during the past two decades. In particular, the composition of the top five states and the bottom six states have generally remained unchanged20. However, gap between them has been growing: the top five states, which accounted for 24.7 per cent of the countrys total population, had a share of 34.6 per cent of all-states Gross State Domestic Product (GSDP) during the early 1980s. This GSDP share increased to 38.2 per cent by the end of the 1990s. On the other hand, the bottom six states which accounted for a 41.6 percent share in the total population, have suffered a setback in their GSDP share, from 35.3 percent to 26.9 per cent, between these two periods. Even the middle five states, the composition of which remained the same, have suffered an erosion in their GSDP share over the last two decades.21 Secondly, the urban-rural disparity too has sharpened during this period. The ratio of urban per capita income to rural per capita income grew from 2.34 in 1993-94 to 2.85 in 1999-2000; given the fact that agricultural growth fell further thereafter, and that growth was concentrated in the private corporate sector, this proportion would
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have shifted much further in favour of urban areas thereafter. There appears to have been a dramatic decline in Government employment in the rural areas: Whereas in 1993-94 the rural areas accounted for 42 per cent of community, social and other services GDP (largely the salaries of Government employees), in 1999-2000 they accounted for just 29 per cent of it.22 Significantly, it is not necessary that a state with large metropolises and high urban income rank have a high rural income. Nor is it necessary that a state with a relatively high rural per capita income have the largest and most prosperous cities. Punjab and Haryana are at the top of the rankings in per capita income because of their betteroff agricultural sector, whereas Andhra Pradesh and Tamil Nadu have large prosperous metropolises but merely average per worker income in agriculture. In Maharashtra, which stands first or second in per capita income, agriculture and allied activities still employ half the workforce, but GDP per capita in the agricultural sector has been falling continuously in per capita terms for more than a decade; remarkably, industrial GDP per capita too has stagnated; only services sector GDP per capita has risen rapidly, concentrated in the metropolitan pocket of Mumbai-Thane-Pune. The percentage of agricultural labourers in Maharashtra with wages below the national minimum wage is roughly the same as in the most backward states of the country Bihar, Chhattisgarh, Madhya Pradesh and Orissa23 Neither is rural growth leading to urban growth, nor does urban growth get diffused to the rural areas. This reflects once again the lack of organic links between the agricultural and non-agricultural sectors. A study of some of the states at the centre of the current boom such as Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Gujarat would reveal a particularly sharp urban-rural disparity, uneven regional spread of growth, low employment growth, and so on. Further, even within backward states the disparity between agroecological sub-regions has worsened.24
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We have sketched a picture of the different sectors of the economy as the economy undergoes dazzling growth. Let us turn to the impetus for the recent spell of rapid growth.
Notes:
1.Economic Development with Unlimited Supplies of Labour, Manchester School, 1954. (back) 2. In this section we have used the Usual Status measure for the various employment shares. There is a slight difference in the employment shares by the Current Daily Status measure, which does not affect our point. The GDP figures used are for the triennium ending 1983-84 and the triennium ending 2004-05. The same applies to Charts 2 and 3. (back) 3. The reason for agricultures worsening terms of trade was that it was opened up to agricultural imports amid a global fall in agricultural commodity prices, even as various aspects of the neo-liberal economic policies raised input costs and depressed domestic demand for agricultural products. (back) 4. As noted by C.P. Chandrashekhar, The Progress of Reform and the Retrogression of Agriculture, www.macroscan.org. (back) 5. Planning Commission, Mid-Term Appraisal of the 10th Plan, p. 193. (back) 6. That is, trade, hotels, transport and communication; financing, insurance, real estate and business services; and community, social and personal services. We have not included construction. (back) 7. Calculated by the National Commission Enterprises in the Unorganised Sector (NCEUS) from NSS data (Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector). However, using Ministry of Labour data for the organised sector with the figure for total usual status employment derived from the NSS, one would get 7.1 per cent and 5.8 per cent for 1999-2000 and 2004-05. (back) 8. Unni, J. & G. Raveendran, Growth of Employment (1993-94 to 2004-05): Illusion of Inclusiveness?, Economic and Political Weekly (EPW), January 20, 2007. (back) 9. National Commission on Enterprises in the Unorganised Sector (NCEUS), Financing of Enterprises in Unorganised Sector, April 2007, on the basis of Annual Survey of Industries
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13. An OECD study found that while the ratio of fixed assets to labour rose in firms with 100 or more workers between 1998 and 2004, it actually fell by 14 per cent in smaller firms. That is, the drought of investment in small firms actually worsened in this period, which would have worsened their labour productivity. Alok Sheel and Sean Dougherty, Constraining labour gains, Business Standard, 28/10/07, citing OECD Economic Surveys: India, 2007. (back) 14. NCEUS, Financing of Enterprises. (back) 15. By the Current Daily Status measure, which captures the extent of under-employment better, total employed as a percentage of the 15-64 age group comes to only 56.5 per cent. (back) 16. The figures for savings and investment are somewhat lower if we ignore valuables and errors and omissions, but the rise is still dramatic. (back) 17. NCEUS, Financing of Enterprises. (back) 18. The effective tax rate on corporate sector profits is now just 20.6 per cent, according to the Receipts Budget 2008-09. Within this, the effective tax rate on public sector firms is 23.4 per cent, and on private sector firms, 19.5 per cent. (back) 19. Taking GDP at current market prices and assuming the effective rate of corporate taxation in both years to be 20.6 per cent (see Receipts Budget 2008-09). The private corporate sectors share of total profits is put at 72.75 per cent by the Receipts Budget. (back) 20. S.L. Shetty, Growth of SDP and Structural Changes in State Economies: Interstate Comparisons, Economic and Political Weekly (EPW), December 6, 2003. (back) 21. Ibid. (back) 22. EPW Research Foundation (EPWRF), Net Domestic Product at Current Prices in Rural and Urban Areas, EPW, 8/3/08. (back) 23. There is no mandatory national minimum wage. The recommendation of the Central Advisory Board on Minimum Wage was Rs 66 with effect from 2004; the National Commission on Rural Labours norm for rural minimum wage works out to Rs 49 at 2004-05 prices. In 2004-05, 97.8 per cent of agricultural labour in Maharashtra received less than Rs 66 per day and 77.4 per cent less than Rs 49. This was worse than Bihar or Orissa.
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NCEUS, Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector, August 2007, p. 124. (back) 24. See the collection of essays on Madhya Pradesh by Mihir Shah and others in EPW, November 26, 2005. (back)
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fueled by internal forces, but by the external environment. (All the regions of developing countries, including sub-Saharan Africa, saw an upturn in growth starting around 2003. Thus Indias surge, while sharper than most other developing countries, is part of a broader phenomenon.) This expansion is not fundamentally transforming the Indian economy and society; rather, it has greatly accentuated its distortions. Moreover, given that the world economy is in a volatile state, and on the brink of a major crisis, the external stimulus to Indias growth may turn into a destabilising factor.
Essentially, the current phase of dramatic GDP growth has not been
Let us look at how this environment has been created. Over the years, the activities and behaviour of international monopoly capital have changed in significant ways. One thing is not new: Capital, as always, is driven by the need to accumulate more capital. Much as sharks must keep moving or sink, capitalists must keep accumulating or go under. However, since the rise of monopoly capital, the worlds chieftains of capital have been faced with a strange problem. They enjoy vast surpluses; but, as a long-term trend, they find less avenues to invest these surpluses profitably. If they put up more productive capacity, they would need to reduce prices in order for all that production to be absorbed; that would mean lower profit margins which goes against the nature of monopoly capital. On the other hand, if they do not invest these surpluses, they cannot accumulate further. This peculiar disease of plenty gives rise to a long-term tendency toward stagnation. Within this long-term tendency there are bouts of hectic investment, such as the boom of dotcom-telecom investment of the late 1990s, but when these bouts of excess halt they leave business even more wary of investment. Rather than quote left-wing economists, we will rely in the following account largely on the Economist, perhaps the leading voice of international capital. It reported in 2005: For the past three years, while profits have surged around the globe, capital spending has remained relatively weak. As a result, companies in aggregate have
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become net savers on a huge scale. Their thrift may explain why bond yields are so low [i.e., interest rates are low because firms are flush with funds]. Since 2000, the corporate sector in the developed countries have switched, as a group, from being big borrowers to being net savers: i.e., their profits exceed their capital spending. The total increase in companies net saving in the past four years has been more than $1 trillion, three per cent of annual global GDP and five times the increase in net saving by emerging economies over the same time period.... If company bosses recognise that the current consumer boom is built on shaky foundations in particular, rising house prices they are likely to be reluctant to invest.1 In the U.S., business expenditure stopped falling in 2004 and began rising again, but it remained weak compared to earlier recoveries. This reluctance to invest has inevitable consequences: Americas long-term potential rate of growth is falling, to perhaps its lowest pace in over a century.2 And yet corporations must invest their savings somewhere. As a result international capital is on a constant hunt for new investment opportunities. In the course of this hunt international capital has been driven to rely increasingly on the growth of the financial-speculative activities, which have far outstripped the growth of the commodityproducing sector.3 The worlds financial markets of all types (stocks, debt, foreign exchange, commodities, and complex financial instruments called derivatives) have witnessed an extraordinary explosion of gambling. To take just one example, the actual use of foreign currency is the import of goods or services; in the entire year 2006, world trade in goods and services was $14.5 trillion. But the buying and selling of foreign currency by international speculators in the same year averaged $2.7 trillion a day. In other words, trading in foreign currency was 68 times what would be required for international trade in goods and services. Similar explosions have taken place in all other financial sector activity, with new instruments being added at a hectic pace. In order for this financial activity to keep growing, it needs to create ever-increasing scope for itself. One way of doing so is by opening up
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economies hitherto closed or restricted for foreign speculative capital, and by removing restrictions on entering various sectors within those economies. The financial sector worldwide sits like a giant parasitic creature atop the commodity-producing sector, demanding complete freedom to enter all arenas and bleed that sector. Staving off worldwide slowdown At the heart of this creature is the U.S. economy. In recent years the world economy has been staving off an underlying slowdown by relying more and more on U.S. consumer demand. U.S. consumers have so far managed to keep buying because of an easy supply of cheap bank credit. This in turn is made possible by the policies of the U.S. central bank (the Federal Reserve, the equivalent of Indias Reserve Bank), which has kept expanding credit by lowering interest rates and relaxing restrictions every time the economy seemed to be slowing. The Federal Reserve has winked at all sorts of risky practices by the financial sector in order to keep credit flowing. However, the purchasing power generated by this cheap and easy credit is not spent on U.S. goods alone. Rather, U.S. consumers keep buying, importing from the rest of the world vastly more than the U.S. exports to the rest of the world. The huge U.S. trade deficit thus ensures a market for the rest of the world. How does the U.S. finance its giant trade deficit? In any other country, such a huge and ballooning deficit would have led to an immediate crisis. But the U.S. has so far been able to finance its deficit with capital inflows from the rest of the world, including from underdeveloped countries, and thus postpone the crisis. Why do these countries invest their capital in the U.S.? Because if they did not do so the dollar would fall against their currencies, their goods would become more expensive in dollar terms (i.e. to U.S. consumers), and their exports would fall, harming their own growth. Also because, as their own economies have been opened up to huge inflows of volatile foreign capital, they need to build up foreign exchange reserves to
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provide for the occasion when there may be a sudden outflow (as happened in Southeast Asia in 1997). Since the dollar is still the main currency used for international payments, countries keep a large proportion of foreign exchange reserves in dollars, in the form of U.S. government debt (known as U.S. Treasury securities). Such is the bewildering merry-go-round of flows to which the world economy is bound. A portion of the giant sea of cash generated by the U.S. in the course of this operation comes back to the rest of the world in the form of speculative capital seeking attractive investment opportunities. This in turn sends third world share markets soaring. While third world rulers are happy with high share prices, this inflow of foreign cash in turn tends to either bloat the money supply in those economies, leading to inflation and instability, or push up the value of their currencies, threatening their exports. To ward off the latter, the central banks of these countries buy up the incoming dollars and invest them largely in U.S. government debt, funding another round of U.S. consumption. The current perverse trend of net financial transfers from the developing economies to the developed countries, which began in 1997 at $1.3 billion, reached $760 billion in 2007.4 We turn once again to the Economist for a description: Worldwide, an abundance of liquidity has lured investors into riskier assets in search of higher returns. Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy, the Economist estimates that in the past four years it has risen by an annual average of 18 per cent, probably the fastest pace ever. Last year it washed through emerging economies in record amounts, pushing up their currencies. Between the start of 2006 and mid-December the Thai baht rose by 16 per cent against the dollar... The deluge of spare cash has two main sources. First, average real interest rates in the developed world are still below their long-term average. Second, Americas huge current-account deficit and the consequent build-up of foreign exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the
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financial system. A large chunk of Asias reserves and oil exporters petrodollars have been used to buy American Treasury securities, thereby reducing bond yields [i.e., interest rates]. In turn, low bondmarket returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities, and properties, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades (borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).... share prices in emerging economies have risen by 243 per cent on average from their trough in 2003.5 The Economist correctly locates the main reason for the tendency of the international financial sector to make riskier investment decisions, namely, the abundance of liquidity and the drive therefore to seek higher returns. It is this drive that explains the current sub-prime crisis, whereby, directly or indirectly, most of the international financial sector has invested in high-interest loans made by banks in the U.S. and U.K. to poor people (i.e., people who are bad risks) to buy houses. Flood of inflows beyond the control of Indian authorities As part of this pattern, India has seen a flood of capital inflows through various channels and under various labels foreign institutional investment (FII) in the share market, foreign direct investment (FDI) (especially in the form of private equity, which behaves much like FII capital), and external commercial borrowings by Indian firms. There are also unexplained inflows in the balance of payments data (e.g. under the head Other capital) which indicate that individuals have been bringing in funds for speculation. As dollars become more plentiful than before, the value of the rupee tends to rise. This can have several harmful effects. First, foreign goods become cheaper in rupee terms, and so domestic producers find it harder to compete with imports. Secondly, Indian exports become
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more expensive in dollar terms, and find it harder to compete on world markets. Both these trends depress domestic economic activity. Thirdly, if the rupee is set on a rising course, it becomes even more attractive for foreign speculators to bring dollars into India; because even if they were to make no profit on their investments in India they would be able to take out more dollars than they brought in. (For example, let us say a foreign speculator brought in $1,000 at the end of December 2006. He would have exchanged it for Rs 44,110. Even if he did not earn a paisa of interest on this sum for a year, he could have bought $1,119 with it at the end of December 2007.) This brings in yet more speculative capital, and worsens the problem. In order to prevent this from happening, the countrys central bank, the RBI, buys up foreign exchange as it flows into the country, and this purchase becomes part of the countrys foreign exchange reserves, which are invested abroad in various types of interestearning bonds such as U.S. government debt. The scale of this phenomenon can be seen in the size of the RBIs foreign exchange assets at end-March of each year: 2003, $71.9 billion; 2004, $107.4 billion; 2005, $135.6 billion; 2006, $145.1 billion; 2007, $191.9 billion an addition of $120 billion in four years. Between end-March 2007 and end-December 2007, the rate of inflow broke all records, as another $66 billion poured into the reserves in just 9 months. Purely parasitic Only a trivial fraction of these inflows went into investment in the Indian economy: In fact, the average for 2002-07 is zero.6 In the words of the Prime Ministers Economic Advisory Council (January 2008), rising levels of investment have been financed from domestic sources through a combination of higher retained corporate earnings and improved fiscal balances of government. There has been little absorption of net foreign savings... Thus, the capital inflows which were in excess of the current account deficit have in an accounting sense become part of the foreign exchange reserves of the central
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bank and [been] re-exported overseas. Nevertheless the Indian economy is compelled to accept these foreign inflows and drain out returns on them simply by virtue of having opened itself to capital inflows; their relation to the Indian economy is purely parasitic. `` While these inflows do not fund investment, they do fuel elite consumption. When the RBI buys up dollars, it pays out rupees to the seller of the dollars; this money winds up in bank deposits. On the basis of these deposits, banks make loans; in particular, they have recycled the surging foreign inflows as loans to individuals for housing, automobiles, and consumer durables. Thus the foreign inflows have to a large extent financed the boom in spending by the middle and upper classes. The RBI has tried to check the runaway growth of money supply caused by inflows by various means: it sucks money out of circulation by selling special bonds and directing banks to keep larger reserves with it. Despite this, the inflows are so large that it cannot mop them all up: for example, of the Rs 2.6 trillion that flooded in between endMarch and end-December 2007, the RBI was able to mop up only twothirds.7 The flood of foreign capital increases the instability of the entire economy by fueling speculative booms in the share market, commodities market, real estate, and so on. The easy liquidity in the economy as a whole, and high returns in speculative sectors, lead domestic investors to join in the casino. The Bombay Stock Exchange Sensex (index of the top 30 stocks) rose from 5591 at March-end 2004 to 12455 on April 2, 200; as if this were not steep enough, it rose at its fastest pace thereafter to close above 20,000 for the first time on December 11, 2007. The Reliance Power issue of shares in January 2008 was the largest-ever initial public offering (IPO) in India. Yet it was fully subscribed within one minute of its opening, and was subscribed 72 times by the time of its closing; the portion reserved for high net worth investors was subscribed 208 times. The issue received Rs 7.52 trillion of bids astounding, considering that
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Reliance Power is a completely new company with no assets, and without record of having executed a single project. Turnover in the commodity futures markets rose by 1570 per cent between 2003-04 and 2005-06, rising from 4.7 per cent of GDP to 76.8 per cent; it soared further in 2006-07. As the speculative boom proceeds, foreign investors may decide at some point that assets are now overpriced (for example, prices may be out of alignment with those of their similar investments elsewhere in the world). They would pull out till prices collapse to an attractive level. Indias share market has seen several steep falls in the last month. The Economist warned in July 2007 that Indias real estate was set for a fall: The only country where a bubble leaps out from these charts [of rise in real estate prices] is India, where average prices have risen by 16 per cent a year over the past four years, well ahead of average income. It is the only country where house prices have surged by more than in America. In Bangalore and Mumbai prices doubled during 2005 and 2006. According to Global Property guide, a research firm, equivalent apartments in South Mumbai now cost three times more than in Shanghai, and not much less than in Tokyo even though Indian incomes are much lower.8 In November 2007 the Economist ranked India as one of the riskiest emerging economies in the world, saying Those with current account deficits [like India] are vulnerable to a sudden outflow of capital if global investors become more risk averse.9 In the calendar year 2007 the Indian rupee was among the three emerging market currencies that appreciated the most, after the Brazilian real and the Thai baht. But India is very unusual in that the rupee has appreciated despite its current account being in deficit,10 i.e., despite it having to cover its current foreign exchange requirements with capital inflows. So the entire appreciation in the rupee was not the result of surpluses on trade in goods and services; rather, it was despite deficits and because of capital inflows.
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A second trend in the global economy has also had a major impact on the Indian economy: the successful drive, since the 1980s, by transnational corporations to increase the share of profit in their income (and to correspondingly reduce labours share). The rise of profits share, which began in the 1980s, has now reached historically very high levels;11 the Economist candidly admits that in the rich world labours share of GDP has fallen to historic lows, while profits are soaring.12 In the course of their quest to drive down the share of labour, armed with new technological developments, transnational corporations have sought out pools of skilled, white-collar labour in countries such as India as replacements for the more expensive whitecollar labour of the imperialist countries. This has spawned a section of employees in India with incomes that are relatively high for India. This section is culturally under the same influences as the urban ruling class sections, and has a similar pattern of expenditure. While this section is sizeable in relation to the erstwhile middle class, and the demand generated by it is sizeable in relation to the existing constricted market, it is tiny in relation to total employment; and even long-term projections of its growth show it to be of no relevance for reducing overall unemployment. Again as part of this drive to increase the share of profit worldwide, and making use of technological developments in production, transport and communications, transnational firms have increased their imports of goods from sites in low-wage countries. (Even so, the maximum value-addition, such as the retailing margin, accrues to firms in their own countries.) This shift has allowed goods made in India, whether by Indian or foreign firms, to enter world markets in certain sectors hitherto closed to them, such as the automobile parts sector. Moreover, several large Indian firms have improved their production standards and are emerging as competitive exporters.
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However, this process cannot continue expanding till the point where the export sector would absorb a major share of the labour force, and thus eliminate, or even substantially narrow, the wage differential between the developed countries and India. First, demand in the developed world is limited, whereas the unemployed/under-employed labour force in India is vast; second, the technology used in such export industries is not labour-intensive; and third, a large number of third world countries with large reserves of unemployed/underemployed are similarly attempting to export to the limited developed world market. Continuing success in exports requires that wages be held down, and the Indian State has been ensuring this by changing the environment for labour i.e., simply refusing to implement workers legal rights, using State machinery against struggling workers, creating an openly anti-worker climate among the judiciary, and so on. (Moreover, volatile capital flows either way tend to build downward pressure on wages: With large capital inflows the rupee appreciates, making Indias exports less competitive; in response exporters try to reduce costs by reducing wages. With large capital outflows the rupee depreciates, prices of imported commodities such as oil rise, and inflation eats into workers real wages.)13 Thus, even as the share of wages in value-added in the developed world declines, its share in countries like India does not rise; rather it too falls. It is important to note here that foreign trade has not boosted demand in the Indian economy: Net exports (exports minus imports) is a negative figure. In other words, the market India loses because of imports is larger than what it gains by way of exports. The Economic Survey 2007-08 notes: The contribution of net exports of goods and services to overall demand also declined between the two plans to a negative 5 per cent. Thus the external trade has had a dampening effect on aggregate demand during the just completed Plan (200207). The contribution remains negative in 2007-08. It is worth pausing and noting a significant point here. Two of the most important claims made regarding the benefits of globalisation are that foreign capital boosts investment and foreign trade opens
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expands markets and thus boosts demand. We have seen that in fact (i) foreign capital has not gone into investment, and (ii) under globalisation Indias foreign trade has actually wound up depleting its markets and depressing demand. However, it is not as if the inflows of foreign capital have had no effect at all. They have helped foreign capital capture more and more of the Indian economy, as we shall see below. Indian multinationals: the global context The rise of Indian firms capable of making sophisticated goods such as automobiles and pharmaceuticals for world markets is a new phenomenon, apparently marking a shift in the clout of the Indian capitalist class in the world economy. This impression is further strengthened by the fact that virtually all the top Indian firms have been busy buying firms abroad during this period. In 2006 Indian firms announced foreign takeovers worth $23 billion; by March 2007 they announced another $10.7 billion. It was estimated then that 60 per cent of Indias top 200 firms were planning to make foreign acquisitions. This shows the new-found respect that India commands in the global arena, claims Kumar Mangalam Birla, chairman of the Aditya Birla group.14 However, this is misleading. For this development has been accompanied by another development, namely, the increasing shift of the developed economies to the financial sector. Around a third of the profits growth in the U.S. economy in the last decade has come from the financial sector, which along with the fall in labours share, does much to explain the high profit rates in the economy as a whole. The leading financial firm Goldman Sachs remarks that margins in many non-financial industries remain at historically unremarkable levels.15 The increasing financialisation of the world economy implies a shift in the centre of gravity away from the production of goods or nonfinancial services, a shift to financial sector activities. Where non-
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financial transnational corporations once played the dominant role in shaping the world economy, a greater role is played today by the financial and speculative firms; although giant firms often combine both functions, where the interests of the two conflict the financial sector prevails. (This is not to write a premature obituary of the nonfinancial transnational corporation, but merely to take note of a partial change.) Increasingly it matters little to international financial capital whether a car is produced by a European firm or a Korean or an Indian one, as long as financial capital is able to invest in whichever would be more profitable and to reap the profits of such investment. Indeed if a European firm is likely to do better after being taken over by the Indian firm, international financial capital would support and finance the takeover (this may not hold for firms in strategic sectors such as oil, infrastructure, arms, etc). It is important to keep in mind that FIIs now own very large stakes in the major Indian firms. At the end of December 2007, FIIs held around 37 per cent of the free-float shares (i.e., shares held by those other than the promoters) in the top 1,000 firms of the Bombay Stock Exchange (BSE).16 In 147 firms listed on the BSE FII holdings are 20 per cent or more. In 24 of the top 200 firms in the BSE, the FIIs combined shareholding is higher than that of the promoters (the controlling shareholders). Whereas net inflows of FII investments between 1992 and December-end 2007 stood at $70.78 billion,17 the market value of FII holdings in listed companies on the Bombay Stock Exchange stood at well over $251.5 billion on that date; the returns are staggering. In other words, international financial capital has greatly increased its hold on the Indian corporate sector.18 This financial presence now represents the most prominent form of imperialist capital in the Indian economy. This phenomenon is not restricted to India. For example, after the Asian crisis of 1997-98, Korea was invaded by foreign capital, including FIIs. By May 2004 foreign investors owned nearly half the shares in South Koreas top 10 publicly traded conglomerates; of these foreign holdings, FIIs
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accounted for about two-thirds. Foreigners owned 55 per cent of Samsung, and 47 per cent of Hyundai.19 Take the South Korean steel giant Posco, which is in the process of making the single largest foreign direct investment in India ($12 billion). The Bank of New York, a U.S.-based investment firm, is reportedly Poscos largest shareholder, holding 22 per cent of its shares, and another such U.S.based firm, Capital Research and Management, holds another 4.4 per cent.20 Another 4 per cent is reportedly owned by the famous U.S. investment firm Berkshire Hathaway. Thus, even as new multinational corporations have emerged from the emerging countries, encroaching on the markets of multinationals of the imperialist countries, financial capital of the imperialist countries has invaded the new emerging multinationals. Moreover, given the deluge of spare cash internationally and the Indian corporate sectors high profitability in recent times, Indian firms have been able to borrow large sums abroad at interest rates lower than those prevailing in India. There has been a surge in external commercial borrowing by Indian firms, rising from $2.5 billion in 200506 to $16.2 billion in 2006-07 and to $10.6 billion in just the first six months of 2007-08. For acquiring firms abroad, too, Indian firms generally have drawn on large foreign borrowings; it appears that not all of these may appear in Indias balance of payments. Thus total foreign borrowings by Indian firms in calendar year 2007 were estimated at $42.1 billion, up from $28.8 billion in calendar year 2006. The surge in borrowing took place throughout Asia; acquisition financing... comprised the biggest chunk in overall activity in 2007.21 The strange phenomenon of Indian firms investment abroad should be seen against this larger background of the financialisation of capital worldwide. Rather than marking a basic change from the earlier subordination of the Indian economy by imperialist capital, it remains within the frame of a new, more complex, form of the same.
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The phenomenon of Indian firms investment abroad is also a striking expression of the distorted pattern of the Indian economy. Outflow of foreign exchange on account of Indian direct investment abroad (IDIA) rose from $4.5 billion in 2005-06 to $11 billion in 2006-07,22 and is expected to rise steeply in 2007-08. Whereas the bulk of the economy (in the sense of the sectors in which the bulk of the workforce is employed) is crying out for investment, the private corporate sector, with active encouragement from the State, has been busy exporting capital. As Indian firms are allowed to stage takeovers (even hostile ones) of foreign firms, it will be politically impossible for the Indian State to block foreign takeovers of major Indian firms. The rapidly rising FII stakes in Indian firms may facilitate such takeovers. (Indeed, in certain cases large over-capacity is developing worldwide. In such a situation, consolidation usually starts i.e., giant firms start taking over other firms. Indian firms expect to become targets of large foreign firms on the prowl for takeovers. One strategy for Indian firms to avoid this fate is to become large and/or debt-laden, using the greater access to international capital markets. Thus, with the help of giant foreign borrowings, Tata Steel has taken over an AngloDutch firm much larger, and possessing more sophisticated technology, than it. Whether or not the acquisition turns out to be profitable, the large debt will have to be serviced; and this fact may make Tata Steel, and the precious natural resources it controls, vulnerable to foreign takeover in the future.) Political power of international financial capital The political power of international financial capital in India has tremendously increased. At first it demanded the independence of the Reserve Bank of India (RBI) from domestic political authorities; but this was merely in order to free monetary policy from domestic political pressures so it could be fully subjugated to international financial capital. Insofar as the RBI showed any resistance to
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destabilising financial inflows, it was made to buckle. The power of the FIIs was strikingly demonstrated in a well-known episode. On the evening of January 12, 2005, Y.V. Reddy, the Governor of the RBI, while releasing a publication, remarked on the fact that much of the FII capital inflows could be from dubious sources: There is a scope for enhancing quality of FII flows through a review of policies related to eligibility of registration of FIIs... price-based measures such as taxes could be examined though their effectiveness is arguable. These extremely mild and tentative remarks, which if anything expressed the helplessness of the RBI in the face of foreign inflows, sparked fury from the FIIs. They contacted the Finance Minister, who promptly called the press to rule out any move to tax FII inflows; I have spoken to the RBI governor now, and he means the exact opposite of what has been understood. He said these ideas are thrown up from time to time, but they have been rejected. I reject them now again. Reddy himself was compelled to call a hurried press conference later the same evening to clarify that a tax on FII inflows was not under consideration, and the version of his speech on the RBI website added the phrase that measures such as taxes may not be desirable. This episode reveals the political weight of foreign financial capital in India today. Whatever its qualms, the RBI has had to implement increasing capital account convertibility in which the freeing of investment by Indian firms abroad is a very important step. The further the economy moves toward full capital account convertibility, the greater will be its vulnerability to speculative inflows and outflows. In anticipation of this, the greater will be the rulers need to subordinate domestic economic activity to financial interests: Witness the inability of the RBI to check inflows even of the most suspect variety, despite the consequent rupee appreciation throwing millions of Indian workers out of work (the minister of state for commerce has put export sector job losses at two million), and despite the State having to incur huge subsidies on sterilising foreign inflows (i.e., absorbing them to prevent them from increasing the domestic money
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supply). The Indian State has in fact given primacy to maintaining a favourable environment for FIIs. On the one hand, given the limited supply of free-float shares (i.e., shares held by those other than the promoters), large foreign inflows have made share prices soar; and so FIIs have put pressure on the Indian rulers to make available for purchase a steady flow of fresh shares through disinvestment. At the same time, the Indian rulers have also been finding ways to channel more domestic finance to the share market in order to allow foreign speculative capital a cushion to sell without making a loss. All such measures are being termed giving the market depth. High cost of outflows Finally, even with the limited capital account convertibility India already has implemented, there could be very large capital outflows. While, as we have seen, the large capital inflows that occurred earlier did not benefit Indias economy, large capital outflows would have devastating effects. This is a familiar pattern by now in the world economy. The classic instance is the 1980s debt crisis, which developed from a great global financial rotation that has certain similarities with the current one. After the 1973 rise in oil prices, the oil-producing countries of the third world, lacking broad-based economies and financial infrastructure of their own, deposited their new influx of dollars in the banks of Europe and the U.S.. These banks, now flush with funds, needed to find large borrowers. With the help of the third world ruling elites, they managed to get various third world countries, particularly in Latin America, to borrow large sums, at initial low rates of interest (with provisions for later hikes). They created the impression that these countries could go on borrowing forever, paying off loans with fresh loans. The foreign loans did not really serve development in these countries. But they financed large projects which created business for multinational corporations, and the elites of these countries skimmed off a good portion of these loans, depositing
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them back (illegally) in the same western banks. By 1982, the underdeveloped countries had piled up a mammoth debt of $827 billion. At this point, the U.S., facing high inflation due to a fresh round of oil price hikes, hiked interest rates steeply. The hiked interest rates on U.S. government bonds attracted some capital away from third world countries. Now debtors such as Mexico found themselves unable to meet their foreign debt payments; whereupon all foreign banks stopped extending fresh loans to Latin American and African debtors. Thus began the great third world debt crisis of the 1980s. The International Monetary Fund agreed to provide foreign exchange loans to the debtors (in the bargain, of course, saving the developed-world banks that had lent to these countries), on the condition that they accept what it called structural adjustment packages slashed Government expenditure, massive privatisation, opening of the economy even further to imports, dismantling of efforts to get better terms for agricultural and mineral exports, opening of various sectors to foreign investment and takeover, and so on. These amounted to a great bonanza for the imperialist countries corporations. Latin Americas per capita GDP sank in the 1980s, and poverty grew steeply in what became known as its lost decade. Mexico studiously implemented this programme. The Economist noted in March 1995: Only a few months ago, Mexico was one of the third worlds stars: zero fiscal deficit, removal of import barriers, massive privatisation and foreign investment, capital account convertibility to assure foreign capital complete ease of entry and exit. All this was accomplished in the face of mass distress; popular resentment found militant expression in the uprising in Chiapas in January 1994. To a chorus of praise from the IMF, World Bank, and so on, the Mexican government also piled up high-interest short-term debt subscribed to by U.S. investors. Mexicos exemplary adherence to IMF policies did not save it, however, when the U.S. hiked interest rates from 3 per cent to 6 per cent over the course of 1994. Capital took the next plane out of Mexico in December 1994, sending the value of the Mexican
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currency plunging, and prices soaring. Mexico was thus thrust into crisis again, and into yet another austerity programme with further gains for foreign capital. The 1997 crisis in East and Southeast Asia offers fresh evidence of the devastation caused by such capital outflows, the ground for which was laid in these countries opening up to capital inflows in the earlier period. The countries affected by the 1997 crisis had to suffer soaring inflation as their currency values plummeted. The IMF provided foreign currency loans on severe conditions, which resulted in the stalling of domestic economic activity, takeovers of domestic firms by foreign investors at bargain prices, and an increase in poverty. Thus the harm done by large, sudden capital outflows is not limited to the losses to speculators on the stock exchange; rather it brutally affects the vast masses. As Brecht observed, Those who had no share in the Often have a share in their misfortunes. fortunes of the mighty
Impending slump in the world economy and India There is now a further threat: the impending slump in the world economy, at the heart of which is the ailing U.S. economy itself. A significant aspect of the current U.S. recession is that it coincides with a striking downturn in the career of the U.S. as the principal imperialist power. This latter fact reduces the scope for the U.S. to fund its recovery with inflows of capital from the rest of the world. In the absence of a firm U.S. recovery, and amid the uncertainty accompanying any such major transition in the correlation of leading imperialist powers, the world economy faces the prospect of a protracted bout of stagnation. Global investors, having made major losses, may be particularly wary about investing in third world countries in such a climate; the more so in countries like India, where prices of shares and real estate are perceived to have risen too far. Given that the stimulus to Indias economic boom has come from
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inflows of external capital, such a change in the global economy would depress the domestic economy as well.
Notes:
1. The corporate savings glut, Economist, 9/7/05. (back) 2. Slow road ahead, Economist, 28/10/06. (back) 3. Harry Magdoff and Paul Sweezy were perhaps the first to analyse this phenomenon, in their journal Monthly Review. (back) 4. United Nations, World Economic Situation and Prospects 2008. (back) 5. The global gusher, January 6, 2007. In this paragraph, the Economist contradicts its earlier piece (9/7/05), in which it ascribed low U.S. interest rates in the main to the reluctance of corporations to invest. (back) 6. Economic Survey 2007-08. This is the average gap between domestic savings and domestic investment, which is filled by foreign savings, i.e., net capital inflows. The average figure is zero because in the first two years of the Plan there was actually an export of capital from India. The average for the Ninth Plan (1997-2002) too was quite low: of an investment rate of 24.3 per cent of GDP, foreign inflows accounted for only 0.7 percentage points. (back) 7. Economic Advisory Council, Review of the Economy, 2007-08, January 2008. (back) 8. Home truths, 7/7/07. (back) 9. Dizzy in boomtown, 17/11/07. (back) 10. Economic Advisory Council, op. cit. (back) 11. Ellis, Luci and Kathryn Smith, The global upward trend in the profit share, BIS Working Papers no. 231, 2007. (back) 12. Rich man, poor man, Economist, 20/1/07. (back) 13. Generally workers wages catch up with price rise at best with a delay; and given that a large percentage of workers in export sectors are in the unorganised sector (textiles,
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garments, leather goods, marine products, etc), they would be unlikely to get fully compensated for price rise. (back) 14. Marauding maharajahs. (back) 15. Profit mirages, Economist, October 14, 2007. (back) 16. By market capitalisation, that is, the market price of the shares multiplied by the number of shares. We have converted at the rate of Rs 39.4/US $. The share holding data is from the Prowess database, CMIE. (back) 17. Net inflows of FII capital from Economic Survey 2002-03 and RBI Bulletin, February 2008. (back) 18. Another form of such capital, what is called private equity, is officially classified as foreign direct investment, but actually is speculative and volatile like FII investment. According to the firm DataSource, total private equity deals in India announced in 2007 amounted to $19 billion. (Economic Times, 18/2/08). (back) 19. A quiet foreign invasion of Koreas giants, New York Times, 20/5/04. (back) 20. Wysham, Daphne, Blood Money: U.S. Bank Funds Korean Project that Will Destroy Native Community, 21/4/07, fpif.org/fpifoped/4183. (back) 21. India overseas loans hit record $42 billion, Business Standard, 4/1/08. Thomson Financial is cited as the source for the data. (back) 22. RBI, Annual Report 2006-07. (back)
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IV. (3) Private Corporate Sector-Led Growth and Exclusion Till the 1990s public sector expenditure gave some stimulus to demand for the production of large industry. The private corporate sector also soaked up cheap finance from State agencies, and enjoyed partial protection from imports of finished goods. Despite this comfortable environment, the underlying paucity of domestic demand reflecting the condition of the vast majority of people restricted the rate of industrial growth in India. And the nature of demand (i.e., for what types of products) skewed the pattern of growth, away from items of mass consumption such as cheap textiles, and toward elite consumption. This skewed, import-dependent pattern of production restricted employment creation by industry; and the sluggish growth of industrial employment in turn restricted the market for mass consumption goods. Thus when spells of rapid growth occurred, they were distorted and self-limiting. The high industrial growth rates of the 1980s were unleashed by the relaxation of controls on industry, imports, and external borrowing. Given the Indian elites insatiable desire for foreign goods, and the propensity of Indian big business to operate as merchants rather than as industrialists, this relaxation was accompanied by a surge of foreign collaborations; this resulted in large imports and large trade deficits; this was in turn funded by foreign debt (not coincidentally, international banks in this period were hunting for borrowers). This culminated in the debt crisis of 1990-91. The further liberalisation post-1991 unleashed another bout of growth in the mid-1990s oriented toward elite demand; this petered out by the late 1990s, and was followed by another bout of stagnation. It is yet to be seen how long the present bout of growth can be sustained. The proponents of the current policies argue that it is broad-based compared to earlier such bouts, that Government finances are in better shape, and that long-term trends in the
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international economy (in particular the growth of outsourcing) imply that growth of services exports will continue indefinitely. Let us assume there is some merit in these arguments. Regardless of whether or not growth continues, however, the pattern of industrial development taking place has some striking features which we need to note. These features help us understand whether, either now or in the future, the present trends will translate into the betterment of the people of India. In fact the pattern of corporate sector growth, whether in industry or services, not only fails to pull up the rest of the economy; the present pattern of growth is based on exclusion, the fencing-off of the growth sectors from the rest of the economy.
A. Bank Credit: Strengthening Dualism Explosive credit growth turning from production to upper-class consumption Encouraged by Government policy, and fed by massive foreign capital inflows, bank credit grew 227 per cent between 2001-02 and 2006-07, nearly three times as fast as GDP at current prices. This explosion has played a key role in the current expansion; and nowhere is the dualism of the economy more striking. The liberalisation of banking marked a major shift of finance from productive sectors to consumption. The RBI Annual Report 2006-07 notes that the share of personal loans [i.e., loans for housing, education, automobiles, consumer durables, credit card expenditures, etc] in total bank credit extended by scheduled commercial banks increased from 6.4 per cent at end-March 1990 to 23.3 per cent at end-March 2006, driven by housing as well as non-housing loans. While the share of housing credit in overall credit rose from 2.4 per cent to
Table 1: Disparity in Credit-Deposit Ratios and Credit/Person of Scheduled Commercial Banks across Different Regions, 2006
CreditDeposit Ratio (%) Northeast Region Central Region Eastern Region Credit as ratio of % of all-India Population credit per person 0.24 0.30 0.35 1.53 1.19 2.55 1 3.7 24.9 22.1 13.7 21.8 14.5 100
Northern Region 64.6 Southern Region 84.4 Western Region All India 92.0 72.4
Source: Calculated from RBI, Basic Statistical Returns. Population is of 2001 Census. While the regional chauvinist leader Raj Thackeray has whipped up riots in Maharashtra demanding that migrants from U.P. and Bihar leave the state, he has not raised any objection to capital from U.P. and Bihar migrating to Maharashtra. The difference between bank deposits and bank credit in U.P. is over Rs 900 billion, and in Bihar is almost Rs 320 billion; whereas in Maharashtra, as we noted, credit is higher than deposits. The migrants from U.P. and Bihar are merely following the capital that has flowed out of their states; were there
B. Enclave Development The New Economy The information technology (IT) and information-technology enabled services (ITES) sectors have been at the forefront of growth in the last decade. One of Indias principal advantages in this field is a colonial legacy: the dominance of English in secondary and higher education, as well as in various important aspects of society and the economy. The educational system that once produced clerks for the Raj now excels in producing a cheap skilled labour force for multinational corporations. Of course, this means that the historical disparities in Indian society get reinforced by the success of these industries: one survey-based study finds that one of the reasons for the IT industrys success is that it has been able to tap the existing cultural capital of the urban middle classes (which consist primarily of high and middle castes) including their educational attainments, knowledge of English, and some degree of westernised social orientation and habits. The IT workforce is drawn mainly from this section of society, and by providing new and lucrative employment opportunities it is in turn contributing to the reproduction and consolidation of middle class/upper caste domination.18 Another study calculates that somewhere between 4-7 per cent of all Indians have the kinds of educated parents that characterise successful new entrants to the software industry.19
D. Development as Exclusion The notion that growth of manufacturing or services industries is per se desirable is a form of fetishism. We need to ask questions such as Does it create net employment (i.e., does it create more jobs than it destroys)?, Does it meet mass consumption requirements (either directly or by developing the capacity to meet these requirements)?, Does it squander the economic surplus on luxuries? Does it divert resources from more pressing priorities? Is it environmentally sustainable? Does it exhaust natural resources?, Does it uproot
Indias Runaway Growth: Distortion, Disarticulation, and Exclusion 126 Ships: The Human Cost of Breaking Ships, documents, with interviews
and photographs, the horrific conditions at Alang. The authorities maintain no proper records of workers; indeed it is clear they do not want any record to be kept. Records of deaths are kept only by the employers, who naturally understate the number greatly. The workers fear for their jobs, and the employers do not tolerate trade unions. There is of course no monitoring of toxic waste-related diseases; sampling of the environment shows that workers exposed to deadly asbestos fibres 24 hours a day. All this is made possible by the feudal conditions in the rural areas. Local (Gujarati) workers are a minority; the bulk are migrant workers drawn from backward regions of Orissa, U.P., and West Bengal. It is estimated that there are about 800,000 workers from Orissa in Gujarat, 90 per cent of them in hazardous industries such as ship-breaking. A particular recruiting-ground is Ganjam district, which, despite its fertile paddy land and water resources, is marked by unemployment due to landlessness. It is estimated that one man in each household leaves the district in search of work, many traveling to Gujarat and Maharashtra. Adapada village, for example, has as many as 22 Alang shipbreaking widows and many Alang cripples. In the words of a worker from Khaling village, If I go to Alang maybe one person will die, but if I stay five people will die. The connection between feudal conditions and the conditions of labour in Indian industry could not be more concisely stated. We cite these industries merely as instances, to illustrate once more the broader point that devastation of the environment and physical damage to workers and other people do not get reflected in the calculation of growth. Perhaps the state with the fastest-growing industrial sector in India is Gujarat, but it is also the most polluted; pollution is greatest in the two belts in which industrial investment has been concentrated since the 1980s, the so-called Golden Corridor and Silver Corridor. We may also take note here of certain other industries which, using the countrys backwardness, use the human body itself as a site for surplus extraction. Indias giant pool of poor and unemployed forms the
Indias Runaway Growth: Distortion, Disarticulation, and Exclusion 130 Air travel: For example, only around 1-3 per cent of Indias population
travels by air.49 Yet not only has air travel become a major industry in India: the Government has taken up promotion of the sector as a mission. Domestic and international air passenger traffic (combined) has almost doubled between 2004 and 2007. The latter is growing particularly fast; indeed, at 32.5 per cent in 2007,50 reportedly faster than in any other country. The Railways have been reducing their airconditioned class fares to recover customers who have shifted to air travel. This growth requires huge imports. In 2004 airline operators in India had only 125 aircraft;51 now, according to the Economic Survey 2007-08, the countrys 14 scheduled airline operators have 334 aircraft, and were given permission during 2007 for import of another 72. Further, the ministry has given in-principle approval for import of 496 aircraft, of which more than 250 aircraft are likely to be acquired in the next five years by scheduled airlines. In short, the Indian aviation sector has emerged as a gold mine for the worlds duopoly, Airbus and Boeing: the two have 400-450 aircraft on order from India.52 The price tag averages around $100 million per aircraft. The growth of domestic private airlines has been fueled by foreign funds: for example, Goldman Sachs, BNP Paribas, and the Dubai governments private equity fund have invested in SpiceJet, and HSBC in Jet Airlines. Private equity funds have also invested in the firms which have taken over Mumbai and Delhi airports. The rapid growth of the sector is one of the factors in transport becoming one of the fast-growing heads of GDP. Yet, to return to the broad theme of this section, its contribution to GDP does not make it desirable per se: rather, it is a luxury enjoyed by a trivial percentage of the population, causing drain of foreign exchange in multiple ways (on import of planes and their servicing; on fuel; on profits of foreign investments in the sector), appropriating large areas in cities and their vicinity, and causing environmental damage. Far from being promoted, air travel should be minimised, particularly in a poverty-ridden country.
The mall phenomenon: Only a small fraction of even urban India can
afford to shop at malls, which largely house upmarket brands, and generally have to be reached by car. Some others come to gape at the displays and hang around, adding to what in marketing lingo is referred to as footfalls, but not to purchases; however, these are seen as nuisances by the mall-owners, who do their best to keep them out or prevent them from hanging around. It is possible that the market for malls has been over-estimated, but the frenzied growth in their construction has at least created a market for the real estate/construction industry. In 2002 India had 6 malls with 1 million sq ft; it had 90 with 19 million sq ft in 2007; and these figures are expected to triple in 2008.55
Indias middle class It is true that the market for luxury industries in India now includes what are called the middle classes. However, the term conjures up a misleading analogy to the sizeable middle class of the U.S., Europe and Japan. By comparison this class is a small segment of Indian society. The media frequently uses a figure of 200-250 million for Indias middle class, but it is difficult to imagine the basis for this. The international consulting firm McKinsey uses a figure of 50 million for Indias middle class, or less than 5 per cent of the population.56 According to the NSS 2004-05, about 89 per cent of the population spent less than Rs 37 per day (which was $0.83 at the then exchange rate).
Table 2: Distribution of Rural and Urban Population by Monthly Per Capita Expenditure (Rupees) during 2004-05
Rural Population (72.2 Urban %) (27.8%) MPCE Population Class (Rs.) (%) <235 235-270 270-320 320-365 365-410 410-455 455-510 510-580 580-690 690-890 890-1155 1155 over & 3.4 3.8 8.8 10.5 10.6 10.0 10.8 11.3 11.6 10.1 5.2 4.0
Population
MPCE Population Class (Rs.) (%) <335 335-395 395-485 485-580 580-675 675-790 790-930 930-1100 4.4 4.5 9.5 11.4 11.1 10.0 10.1 9.1
1100-1380 9.7 13801880 18802540 2540 over & 9.7 5.6 4.9
E. State Intervention to Transfer Surplus to the Private Corporate Sector Privatisation and the concentration of wealth Among the factors accelerating the concentration of wealth in this period has been the privatisation process. Privatisation has taken various forms: for example, the disinvestment of shares of public sector firms (or raising of capital by such firms from the share market); the sale of public enterprises with handover of management control to private firms; public-private partnerships in the infrastructure sector; and the opening up of profitable sectors such as telecommunications hitherto closed to private firms. (i) Virtually all partial disinvestment of shares in public sector firms has been carried out consciously at prices which are attractive to investors, namely, at prices which yield investors a bonanza. This was deemed to be necessary to ensure the success of privatisation. As a
Subsidies to big industry While the neo-liberal programme condemns subsidies such as those on food and fertiliser, and the supposed subsidy on petroleum,61 it promotes an array of subsidies to the private corporate sector. These subsidies take various forms. First, there are large transfers disguised in form of sums owed to the State by the corporate sector which the State makes no serious attempt to collect. Large borrowers with 11,000 individual accounts accounted for as much as Rs 400 billion of total bad debt of banks by 2001-02. Among public sector banks too high-value defaults involving 1,741 accounts over Rs 50 million amounted to Rs 228.66 billion. (Even these may be understatements, since banks tend to evergreen corporate loans, providing fresh loans in order to prevent default.) Whereas banks frequently attach the entire property of defaulting peasant borrowers and even have them arrested, no such stringent measures have been taken with the big borrowers, and, unsurprisingly, efforts to recover bad debts have met with little success. Banks bad debts have been reduced over the last few years not largely by collection, but by lengthening the schedule of repayments, making provision for bad bad debts out of banks profits earned elsewhere, and infusion of capital by the Government into the public sector
The State also extends loans, grants, and supportive infrastructure to the private corporate sector. Let us take the example of the automobile industry. (i) State policy deliberately promotes the use of passenger automobiles against public transport. According to one study, the tax burden on buses in India is 2.4 times that on passenger cars. In Mumbai, cars make a one-time tax payment to the municipality of 4 per cent, whereas buses pay a 17.4 per cent tax annually.64 (ii) Unlike the case in many developed countries, in India free parking space is made available for cars on city roads; and even municipal parking lots charge Rs 10 for 12 hours. According to the Centre for Science and Environment, transport regulators calculate the amount of land required to park a car at an average of 23 sq metres (which includes the space occupied by the vehicle as well as the minimum space needed to move it into and out of the space). At this rate, even paid parking comes at Rs 26/sq metre per month, or Rs 600 per month per vehicle. This is a tiny fraction perhaps a few percentage points of the rent for an equivalent space. (It is worth comparing this space to the standard space allotted to evicted slum families in rehabilitation projects: 21 sq metres, or 225 sq ft.) More to the point, it does not begin to meet the costs of road construction and maintenance in proportion to private automobiles share of road traffic. (iii) Innumerable flyovers, bridges, elevated corridors, and so on are built in cities for the benefit of car owners; as mentioned earlier, these are generally out-of-bounds for buses. In 2005 Delhi was reported to be in the process of building 50 flyovers, at an average cost of Rs 400 million per flyover; the budget for a super ring road and elevated corridor on the existing ring road was put at Rs 40 billion. Mumbai has constructed an even larger number of flyovers, but much more expenditure is to come: for example, major bridges across the
F. The Growth of Inequality and the Fear of Social Unrest There can be little doubt that the period of liberalisation has witnessed a sharp growth in inequality. One need not turn to Leftist economists: Even those working for FIIs and the International Monetary Fund (IMF) have pointed this out in blunt terms. Of course, their concern is that the widespread perception of inequality will lead to political instability, and thus derail the liberalisation train. Chetan Ahya, executive director of Morgan Stanley (MS), raises the alarm: We believe the rise in inequality, when absolute poverty levels are still very high, poses a major political challenge.... in the long run, a high level of inequality can hurt growth on account of socio-political tensions. Ahya says MS analysis indicates that India has witnessed an increase in wealth of over $1 trillion (over 100 per cent of GDP) in the past four years and that the bulk of this gain has been concentrated within a very small segment of the population. He cites three measures:
Table 3: Annual Average Growth Rates of Household Consumption Expenditure by National Income Data and National Sample Survey Data, 1983-94 and 1994-2005
Period 1983 to 1993-94 National Income Data 1.84 NSS Data 0.91 1.31
1993-94 to 20043.30 05
Source: India: Selected Issues, IMF, 2008. In constant prices. Which section of respondents would understate their levels of consumption, or would tend to be left out of an official survey? It is unlikely that the wealthy would reveal to official surveyors their real levels of consumption expenditure. Indeed it is unlikely that the rich would cooperate with a time-consuming survey in the first place, as a result of which their consumption would not be captured in the NSS data at all. Thus according to NSS 2004-05, the top 4 per cent of the population have an average per capita expenditure of just Rs 93 per day, or Rs 2800 per month, which is scarcely credible; as we mentioned
do not act in a more socially responsible manner, our growth process may be at risk, our polity may become anarchic and our society may get further divided. We cannot afford these luxuries. (emphasis added)
The speech created a brief commotion, but no one mentioned its most curious aspect: It is traditionally expected that the State would act to check such developments as threaten the existing social order, by taking, if necessary, actions that restrict even the wealthy and powerful, in their own long-term interest. Evidently this option is not open to the Prime Minister. Under the present order, all the engine driver can do is plead with the speed-hungry passengers that the train is hurtling toward disaster even as he shovels the coal. The UPA government, he assured the CII, would continue to create a friendly environment for the growth of manufacturing industry; corporates must facilitate more employment. The Government has its role and responsibility but so do the better-off sections of our society. This is where I look to the CII for leadership. (emphasis added)
Finally, he issued a grim political warning: If those who are better off
G. Financial Sector Subordinates the Productive Sector Even as a tiny domestic elite has flourished in this period of rapid growth, foreign speculative investment has enjoyed dazzling returns: whereas net inflows of FII investments between 1992 and Decemberend 2007 stood at $70.78 billion, the market value of FII holdings in listed companies on the Bombay Stock Exchange stood at well over
Notes: 1. At the same time, in recent years the corporate sector has increasingly relied on their retained profits, the share market and foreign borrowings for its requirements of funds; this has deprived banks of a large share of the credit market, and driven them further in the direction of lending to consumers. (back) 2. Economic Times, 23/4/07. (back) 3. Business Standard, 16/3/07. (back) 4. Times of India, 13/2/08. (back) 5. Another factor in the slowdown was the appreciation of the rupee, which led to a slowdown in exports. (back) 6. EPW Research Foundation, Increasing Concentration of Banking Operations, Economic and Political Weekly, March 18, 2006, Table 5. The number of accounts in semi-urban areas too shows a fall. (back) 7. Reserve Bank of India, Annual Report, 2006-07. The semi-urban and urban population accounted for the remainder of the deposits and credit. (back) 8 .R. Ramakumar and Pallavi Chavan, Revival of Agricultural Credit in the 2000s: An Explanation, EPW, December 29, 2007. (back)
IV. (4) The Condition of the People Market reproduces and reinforces skewed pattern of distribution The structure of Indias economy permits growth to proceed even as the condition of the vast majority declines. As we have seen in earlier chapters, market forces do not lead to the automatic spread of development across wider social sections. Rather, they can operate to reproduce, and even strengthen, the existing exclusion of the vast masses from the market: (i) The present pattern of development creates a distorted pattern of employment, with the bulk of the workforce crowded into low-income sectors, and a small section in high-income sectors. (ii) This in turn gives rise to a skewed distribution of income, concentrated at the top. (iii) The different income groups constitute distinct markets. Workers, peasants, and other working people rely to a large extent on the unorganised sector for their needs. By contrast, the high-income groups rely more on the organised sector (including, now, organised retail); they identify with an international elite, and their tastes are shaped, indeed their very wants are generated, by the sales effort of international firms. (iv) The organised sector (that is, in the main, the private corporate sector) creates less jobs per unit of investment, of which a higher proportion are high-income jobs. On the other hand the weak purchasing power of the working people depresses demand for the production of the unorganised sector, which is a relatively employment-intensive sector. In this way the skewed distribution of
Source: NSS Report no. 513. The original basis of the poverty line was a basket of goods which contained at least 2400 calories per capita per day in the rural areas, and 2100 per capita per day in the urban areas. This basis yields very high levels of poverty: Utsa Patnaik calculates that 87 per cent of the rural population was unable to obtain 2400 calories per day in 200405.1 But even if we accept the norms and calculations NSS itself has adopted, two-thirds of the countrys population in 2004-5 had a calorie intake below the nutritional norm. Around half the population is more than 10 per cent below the norm. (Again, going by the NSSs own calculations, there has been a clear deterioration between 1993-94 and 2004-05; see Table 2.) The NSS results also show that it is not the idle rich, but the labouring poor, whose consumption is below the norm: Calorie consumption rises with income level, with the highest expenditure class consuming double that of the lowest in both rural and urban areas.
Table 2: Percentage of Population More than 10 Per Cent Below NSS Norm of Calorie Intake2
1993-94 Rural Urban 42.0 48.8 2004-05 49.1 53.6
So distorted is the Governments method of calculating poverty, that from the same National Sample Survey data which depict such
Source: NSS Report no. 513. The neo-liberal economists also claim that the decline in cereals consumption is not worrying, as people are diversifying their diet, and eating more high-quality foods like milk, meat, fish, eggs, and so on. It is true that a larger percentage of total consumption is composed of such foods. However, as can be seen from Table 3, not only has calorie consumption declined, but so has protein consumption, falling 5 per cent in rural areas during 1993-94 to 2004-5 while remaining at the same level in urban areas. Indeed, even more than the fall in calorie consumption levels, it is the fall in protein consumption levels that
conclusively proves the involuntary nature of the deterioration in nutrition. Of course, both calorie and protein measures arise from a
Appalling nutritional outcomes This is in line with the appalling nutritional outcomes, as brought out by the National Family Health Survey of 2005-6: Almost half of children under five years of age (48 per cent) are stunted, that is too short for their age, an indicator of chronic malnutrition, and 43 per cent are underweight. The proportion of children who are severely undernourished is also notable 24 per cent are severely stunted and 16 per cent are severely underweight. Wasting, defined as an abnormally low weight for the childs height, is also a serious problem in India, affecting 20 per cent of children under five years of age. Since NFHS-2 (1998-99), there has been only a slight improvement in the percentage of young children who are stunted and underweight, and the percentage who are wasted has actually increased slightly. Moreover, the incidence of anemia among children under three years has actually risen from 74 to 79 per cent. The incidence of anaemia among women (ever-married women aged 15-49) has risen from 52 to 56 per cent between 1999 and 2006. Among pregnant women (aged 1549) the incidence of anaemia has risen from 49.7 to 57.9. The decline of calorie and protein consumption is a telling indicator the actual state of consumption of the vast majority of people. underlines the fact that the surge in luxury consumption is not indicator of a general rise in incomes and living standards, but possible because of extreme inequality. of It an is
In colonial times, port cities created by British rule, such as Bombay, Madras, and Calcutta, grew with colonial trade, with hardly any spread of industry from these nodes into the interior. While the number and size of cities has grown since then, the contrast between the major cities and the surrounding regions remains glaring even today. The huge investments being made in the urban areas, particularly in the metropolises, stand in stark contrast to the condition of the rural areas in the most basic facilities, such as education, health care, sanitation, drinking water, electrification, rural roads, and communications. To take a particularly striking example, according to official figures, in April 2005, 42 per cent of habitations more than 100 in population did not have access to potable drinking water within 1.6 km. The Bharat Nirman scheme, announced with much fanfare in 2005, aims at clearing only 72 per cent of this shortfall by 2009; the Eleventh Plan document released in December 2007 admits that there has been a huge shortfall in the implementation of even this scheme. The targets, even if achieved, are no guarantee of continued supply of drinking water: Over 360,000 habitations reported in 1999 to have been covered were reported by 2005 to have slipped back, and no longer had drinking water. Given the States failure to guarantee such an elementary requirement of life, the gaps in other facilities6 are hardly surprising: Nearly half of rural households did not have electricity in 2002. With regard to three elementary facilities drinking water, electricity for lighting, and a latrine only one in nine rural homes enjoyed all three within the premises. Nearly two-thirds of rural homes were made partly or wholly of katcha materials (i.e., unstable construction materials such as mud, grass, reeds, bamboo, etc.). More than half the villages were more than 5 km away from the nearest Primary Health Centre (PHC), and more than one-fourth were more than 10 km away from it; and so on. (Nor is the existence of a
and
State
2007-08 2.91
and
State
Source:Economic Survey, 2007-08 Much of this rising share of private expenditure on education is involuntary. There is a general perception that lack of education is a disadvantage in the scramble for the meagre jobs available. Given this, and given the shortcomings of the public education system (the result of inadequate public expenditure), the lower income groups are virtually forced to pay for private schools, private colleges, and private tuition (the latter, an expression of the extreme distortions in Indias educational system, has become a significant service industry). The situation of health expenditure is similar. Here the NCMP pledged that The UPA Government will rise public spending on health to at least 2-3 per cent of GDP over the next five years. In fact the combined spending of the Centre and the states has remained at 0.9 to 1 per cent of GDP in these years.12 Health expenditure in the 2008-09 Central Budget is just 0.34 per cent of GDP, more or less the same as the previous year. As a result, the common people will continue to be forced to turn to the rapacious private sector for their health care needs.13
sector outside agriculture. These workers are concentrated in manufacturing, construction, trading, transport, and (in the case of women) domestic services. The NCEUS report provides some details regarding the wretched conditions of work in these occupations: the poor ventilation, temperature, humidity, lighting; the lack of safety and commonness of occupational diseases; the non-availability of facilities such as drinking water, washing facilities, rest rooms, creches, canteens, sanitation, and housing; the extended hours of work and absence of paid holidays. The manner in which this workforce is recruited frequently through a network of family/caste/community, or through labour contractors who operate through similar channels deters labours self-organisation. The concept of a minimum wage hardly exists in India except on paper, and even there it is obscure. What defines the minimum? Several states have statutory minimum wages well below even the
Source:Jeemol Unni, G. Raveendran, Growth of Employment (1993-94 to 2004-05): Illusion of Inclusiveness?, EPW, 20/1/07. Figures here are for non-agricultural wage employment in urban areas. Apart from those officially classified as wage workers, of those classified as self-employed, about 12 per cent18 are homeworkers, or home-based workers; they receive raw materials from contractors and receive payment (usually on a piece-rate basis) for the finished goods. In effect they are disguised wage workers. Unlike other wage workers, however, they have to bear various costs of production they purchase, repair and maintain their own tools/machines; the costs of some inputs (eg thread), transportation to and from the
Indias Runaway Growth: Distortion, Disarticulation, and Exclusion 186 Self-employment: However, the bulk of unorganised employment
outside agriculture is self-employment. According to the NCEUS, there are 92 million self-employed workers outside agriculture. Similarly, in agriculture, 64 per cent of the workforce are cultivators (i.e., self-employed), and the remainder agricultural labourers. Thus the Indian economy is dominated by self-employment. Outside agriculture, self-employment is largely own account (i.e. purely self-employed) workers and their unpaid family members. Own account enterprises (OAEs), i.e., with no hired labour, account for 87 per cent of the informal sector enterprises and 73 per cent of the labour of such enterprises. The condition of the OAEs is dismal. In 2000, the average value of their fixed assets was just Rs 39,000 per enterprise; their earnings per worker were just Rs 2175 per month in the urban areas and Rs 1167 per month in the rural areas. Assuming a family size of five, this would put them below even the official poverty line of that year.
The above provides a glimpse of the complex web of employment outside agriculture in India. The character of the employment is precarious, and earnings from it may not even meet bare subsistence needs. Most of it is isolated, and it is difficult if not impossible to organise against the employer, if any. That very isolation also makes it difficult for the workers to unite to make demands of the State. Underlying this rickety edifice of isolated, ground-down employments are agrarian conditions, to which we will turn in the next chapter. In turn, this pattern of subsistence employment offers no escape from agricultural stagnation and bondage, but becomes merely an urban mirror-image of it; thus it perpetuates the overcrowded misery of agriculture as well. Retrogressive social divisions and the pattern of employment This pattern of employment also provides the basis for the perpetuation of retrogressive hierarchies and divisions among the
Table 7: Percentage of Non-agricultural Workers in Organised Employment: OBC Muslims, Other Muslims, and All Socio-Religious Groups
Muslim OBCs Other Muslims All SocioReligious Groups
Source:NCEUS, op. cit. Considering their dependence on self-employment, access to credit would be particularly important to Muslims. Yet, although they constitute 13.5 per cent of the population, and 12.2 per cent of priority sector loan accounts of scheduled commercial banks, they account for only 4.6 per cent of the amount outstanding under priority sector amount outstanding. This type of enduring partition or stratification among the mass of working people is typical of a stunted economy such as Indias. The capitalist transformation in the original capitalist countries tended to break down the barriers among various social groups and sharpen their class demarcations (though never comprehensively, for the ruling classes needed to maintain these non-class differentiations as a tool against the struggling unity of the working people). However, the isolation and backwardness of economic activity in an economy like Indias preserves the non-class barriers, and indeed preserves the uneveness between the multifarious social groups. Thus it poses an obstacle to a person of the exploited classes (whether hailing from a social group higher or lower in the hierarchy) becoming conscious of his or her class position. And in turn, as we have seen above, the differences in social status tend to perpetuate the unevenness in economic status. Thriving caste system and medieval oppression Far from weakening over the course of six decades since the transfer of power from British rule, the caste system thrives in India today, and is indeed strengthened by the prevailing economic processes. We describe below the condition of Dalits, but they are not the only victims of the caste system.
Notes: 1. Neoliberalism and Rural Poverty in India, EPW, 28/7/07. The official cut-off for calculating poverty today is the spending level required to buy the particular basket of commodities which in 1973 would have contained 2400 calories (for rural areas) or 2100 calories (for urban areas). However, the actual pattern of consumption has changed not voluntarily, but because of circumstances beyond the control of the consumers (employment may be further off, hence spending on transport would rise; firewood may no longer be available from the forest, hence fuel costs may rise; and so on). As a result, persons above the official cut-off level of spending are not actually obtaining those levels of calories. The official cut-off level is therefore meaningless. (back) 2. The NSS has been using a norm of 2700 calories per consumer unit per day, and comparing the actual intake with this norm. One consumer unit is defined as the calorie requirement of a normal male person doing sedentary work and belonging to the age group 20-39; the calorie requirements for males and females of different ages are expressed as percentages of this norm, and the requirements for the population are worked out on the basis of the age and gender break-up of the population. The original calorie basis for defining the poverty line was not in consumer unit terms, but per capita terms, and used differentiated norms for rural and urban areas. Here we are merely reporting the NSSs own calculations. (back) 3. Cambridge World History of Food, vol. I, ed. Kenneth F. Kiple and K.C. Ornales, p. 899. (back) 4. CDMC, 1st Report (Marathi), August 2004. (back) 5. Malnutrition deaths: Centre, state get notices, Times of India, 9/9/07. (back)
IV. (5) The Agrarian Impasse and Its Implications1 We need to consider the state of agriculture most carefully for several reasons. First, the most severe effects of the distortion in the current pattern of development are visible in agriculture, which has slowed as the other sectors have soared. Secondly, agriculture is the sector that employs the bulk of the workforce, and so directly concerns the maximum number of Indias people. Finally, the agrarian economy is the base on which the entire distorted structure of the economy and society is constructed; and so in its transformation lies the key to changing that structure. This is elaborated below. Agricultural slowdown The growth of agricultural GDP has plunged, from 3.3 per cent in 1980-95 to just 2 per cent 1995-96 to 2004-05.2 That is, the slowdown came in the wake of domestic liberalisation and the establishment of the World Trade Organisation. More telling than the slowdown in agricultural GDP growth is the much sharper slowdown in crop production. (GDP refers to value added, namely, the value of output minus the value of inputs; crop production refers to physical output. GDP calculations are more subject to statistical jugglery, especially in sectors where the data are dubious.) We see a fall in physical output per head during 1996-7 to 2003-4. Indeed, if we leave out horticulture (for which at any rate the data base is acknowledged to be very poor) the growth rate is negative in absolute terms, that is, there was an actual fall in crop output during this period.3
The growth in yields of all crops has plummeted (see Chart 1 above)4, and in some cases has turned negative. The slowdown not only spans all crop sectors cereals, coarse cereals, pulses, oilseeds, sugarcane, fruits and vegetables; it even extends to livestock and fishery, which experienced lower growth. Despite the very varied conditions across India, the deceleration was witnessed for almost every state individually, although the pattern varied from region to region. This is the longest deceleration in agricultural growth in the post-colonial period. Declining food security, deteriorating nutritional condition The agricultural crisis has grave implications for the countrys ability to feed itself. In order to maintain the per capita production level of
employment. This helpless situation is what enables various parasitic forces (landlords, usurers, officials, traders in inputs and produce, and the private corporate sector) to feed on them, even to the point of
driving them to suicide. Despite the very great disparity of conditions in India, this trapped condition is a common feature throughout.
Remittances from outside agriculture to the peasants whether from family members working in urban areas or abroad, or even engaged seasonally as agricultural labour in regions of relatively commercialised agriculture merely help prevent the small peasantry from going under, but do not fund investment. Small peasant agriculture is thus in continuous crisis but refuses to die out. Indeed, between the latest two NSS employment surveys, the share of wage labourers in the agricultural workforce has declined, and that of cultivators has increased; the share of cultivators, at 64.2 per cent, is higher now
surplus in their hands for accumulation, and are thus unable to carry out expanded reproduction.
Surplus-appropriating sections
The section of farmers with income in excess of expenditure would not be uniform. There would be a section with sizeable lands, keenly seeking ways to maximise profit (including by getting the most work
gross investment in agriculture, and more than five times net investment. It is clear from this that interest payments constitute a
major item of drain preventing accumulation within agriculture. This is an indication of what would be possible when this drain is ended.
What would happen if the average interest rate on total farmer debt (which we have put at Rs 1.95 trillion) were lower, at 8 per cent? In that case the interest payments would be Rs 250 billion lower. If these amounts were directed to investment, gross investment would be 75 per cent higher and net investment would be more than three times higher. These are very crude calculations; more complete data and a more careful study would reveal our rough calculations to be, if anything, underestimates.45 However, such a study can only be carried out thoroughly by peasant organisations to which the peasants would be willing to reveal details they would not reveal to official agencies. In particular, when the lender also supplies inputs to the borrower, buys his/her output, employs or rents land to him/her, the real interest rate may be much higher than the nominal interest rate; but it is difficult to capture this without a study in depth. The largest gains to the lender arise when the borrower is unable to repay the loan, and is forced to part with his/her land. As we saw earlier, returns in agriculture as a whole are uncertain or worsening (given the deteriorating terms of trade for agriculture, and
Horticulture +7.27 Source: See footnote no. 47. What we have described above indicates that with the further and further entry of corporate investment in agriculture the scope for accumulation by the direct producers, the peasants, will only be further undermined, and the productive forces in agriculture as a whole will be further depleted. It is important to note that the effects of the growth of commercialisation, and of exchange with the international economy, are governed by the character of production relations in Indian agriculture and in the Indian economy as a whole. The frame of the Indian economy is one in which industry provides paltry employment, a vast under-employed labour force is therefore crowded into agriculture, the market is narrow in relation to the potential market, and powerful parasitic forces exercising social and economic power are able to flourish even as productive forces stagnate. In these conditions integration with the international economy, even if superficially it appears to open up foreign markets for domestic producers, does not actually stimulate productive forces as it did in economies where the direct producers were already on the path of accumulation and expanded reproduction (as in the original countries of capitalist development). Rather, integration with the international economy here operates through the parasitic forces, the forces which are preventing accumulation. Operating through such forces allows international capital to grind the peasant down to extraordinarily low levels and to extract rich returns; but it
Notes: 1.This is a greatly abridged version of our original draft. We may later bring out the original version as well, as a handy collection of facts and figures. (back) 2. Report of the Steering Committee on Agriculture and Allied Sectors for Formulation of the 11th Five Year Plan (2007-2012), Planning Commission, April 2007; hereafter Report of the Steering Committee. (back) 3. Report of the Steering Committee. (back) 4. Source: Report of the Working Group for the 11th Five-Year Plan on Crop Husbandry, Agricultural Inputs, Demand-Supply Projections and Agricultural Statistics, December 2006. (back) 5. In future, climate change may join the list. (back) 6.Cheap no more, Economist, 8/12/07. (back) 7. Economic Survey 2007-08. (back) 8. NSS Report no. 513. (back) 9. Total area sown with crops and orchards, counting area sown more than once in the same year only once. (back) 10. Area irrigated through any source once in a year. (back) 11. Report of the Steering Committee. (back)
Indias Runaway Growth: Distortion, Disarticulation, and Exclusion 235 Development: Essays on the Indian Economy, 1994. We have also drawn
24. NSS Report no. 500, and S. Subramanian and D. Jayaraj, The Distribution of Household Wealth in India, World Institute for Development Economics Research, 2006. (back) 25. NSS Reports 495-499. (back) 26. Indira Rajaraman, Reforming our agriculture, Economic Times, 2/11/06. (back) 27. The NSS definition of farmer is a person who operates some land and is engaged in agricultural activities [sometime] in the last 365 days. The term farmer is misleading, because it encompasses very diverse classes, from predominantly agricultural labourer households with tiny farms to landlord households with large ones, but here we are merely reporting the SASF findings, and hence have retained the term. (back) 28. Net receipts in the SASF are the value of output minus the expenses on cultivation. The expenses on cultivation are listed as fertiliser, pesticides, seeds, irrigation, hired labour, lease rent, interest payments, and other expenses. -- NSS Report no. 497. (back) 29. We adjusted the value of crop output in the SASF upward to the level of the average output of the five years 2000-05, and further assumed that expenses on cultivation remained the same as in 200203; and finally assumed that all other sources of income in the SASF would rise similarly. If anything, this crude adjustment would overstate the income of farmers. (back) 30. What constitutes the means of subsistence is not fixed. While it must allow, at minimum, for the physical reproduction of labour, the exact amount is determined by specific historical circumstances (including cultural factors as well as class struggle), and varies across different societies. (back)
V. Unlocking the Productive Potential of the Entire Labour Force Productive employment is the key to real development The core of our argument is that the questions of employment, betterment of the material conditions of peoples life, the development of the market, and social emancipation are intricately intertwined, indeed organically linked. Attempts to address one or the other in isolation can proceed only up to a point, whereupon they get stalled or take distorted forms. An integrated approach is required, centering on the question of employment. The question of employment is not limited to the official definition of employment which is limited to whether the existing labour force is engaged in any activity in the hope of somehow surviving. By the official definition, (i) if a person stops seeking work because she has no hope of getting work, she is not part of the labour force and therefore not unemployed; and (ii) if two workers are working where one worker could get the same output, they are still both considered employed. This official definition merely serves to understate the rate of unemployment, and is otherwise meaningless. A proper discussion of employment must concern (i) productive employment of the total potential labour force (those of working age), and (ii) how productive their activity is. For the wealth of society is the sum of the productive activities of the entire labour force. While a small class can become wealthy by maximising profit per unit of investment even with a large part of the labour force kept unemployed, the wealth of society is restricted in the process. The maintenance of a large pool of workers out of the labour market, unemployed, or under-employed, is a sign of the great inefficiency of the social-economic formation.
the condition that the direction of investment and choice of technology are determined by social priorities.
Employment potential of industry It is difficult to get a sense of the vast employment potential of such industry, because all we have before us is the current distorted pattern of industrial development. However, it is worth noting that the small scale industries and traditional industries, which at present account for about half of industrial production, employ 70 million persons (both full-time and part-time). And small scale industries alone, which account for 39 per cent of industrial production, employ 29.5 million persons full-time. By contrast, all of organised private sector manufacturing employed just 4.5 million in 2005. This gives us a clue as to the vast scale of employment and industrial activity that could develop via the unorganised small-scale industry. Starving the small scale sector of capital has damaging effects on not only employment but output as well. Again, illustrations from the present do not adequately convey the potential of a different social order. Nevertheless it is useful to note the following calculation: If small scale and traditional industries had received in 2006 the same percentage of net bank credit they received during the period 199495 to 1999-2000, credit to the sector would have been more than double its actual level, and accordingly employment and output in the sector too would have doubled.5 Most of this output would have been
Notes: 1. Mark Selden, ed., The Peoples Republic of China: A Documentary History of Revolutionary Change, 1979. Selden cites Peter Schran, The Development of Chinese Agriculture 1950-59, 1969. (back)