Democratic deficit

Outside the Bombay Stock Exchange when the benchmark index, the Sensex, dipped more than 600 points on June 27. Financial markets in the growth miracles in Asia China, Vietnam and India are now floundering the most even though real economic growth in them is still better than elsewhere in the developing world.-VIVEK BENDRE

The political battle is on to divert attention from the economic crisis and make the nuclear deal or communal polarisation the clinching issue in the elections.

AMIDST the political chaos created by a Prime Minister bent on pushing through his one-point agenda of clinching a nuclear deal with the United States, few have stressed the fact that this serves one other role besides honouring the Prime Ministers commitment to President George Bush. It helps divert attention from the damage wrought by neoliberal economic policies, reflected in a crisis in agriculture, a high rate of inflation, a volatile exchange rat e, increasingly fragile financial markets, and the likely return to much slower growth.

Rather than debate these issues in the run-up to the elections in a country whose strength lies in its vibrant democracy, the two main political formations are battling to make either the nuclear deal or communal polarisation the clinching issue in the elections. They are unlikely to succeed in that. But what they may achieve is to distort the results of a much-needed second referendum on the kind of economic policies that the previous National Democratic Alliance (NDA) and the current United Progressive Alliance (UPA) governments have followed.

This deficit in Indias political democracy is the outcome of a larger effort of the elite in capitalist democracies across the world to keep under a shroud the inequalising and destabilising effects of the new capitalism dominated by finance. Contemporary capitalism is in a perennial state of denial. Increasing inequalities associated with higher growth are attributed to institutional changes that are reincentivising production. Persisting poverty is dismissed as being a statistical quirk rather than a reality. And speculative stock market or real estate market bubbles are justified by reference to strong fundamentals.

On the other hand, any downturn in growth or the markets is characterised as a correction. Buoyant indices or markets are always a sign of strength. Depressed markets or stock market downturns are presented either as necessary but minor corrections or as problems governments must resolve without hurting private incentive.

This blinkered vision partly results from the need to legitimise a system that weighs in heavily on the side of capital and profit, at the expense of workers, petty producers and the self-employed. It also signifies the ideology that dominates the new ownership economy in which it is not what you earn but what you own that defines your economic status and sense of well-being. If the speculative route to expanding ownership is closed, then the legitimacy of such a system would be under challenge. Public policy aimed at regulating financial and real estate markets, which constitute the fulcrum of the ownership economy, must be delegitimised so that these markets themselves are legitimised.

Even if taken for granted by many today, the notion of the ownership economy is relatively new. Its coming can be dated to the rise of finance and the simultaneous boom in real estate markets. This raised the possibility that even those with relatively small savings, who could not make lumpy investments in acquiring capital assets, could through the mediation of stock and real estate markets make acquisitions that grow rapidly in size because of high rates of appreciation in value.

But if this route to wealth is to be popular enough to make financial and real estate markets the symbols of the new capitalism, it must not be seen as endangered by collateral damage such as rising inequality or persisting or worsening poverty that threatens to destabilise the trajectory. What is more, active stock and real estate markets require that there must be enough people who are convinced that high rates of appreciation are not just based on speculation that would soon be reversed but on fundamentals that would prevail over any corrections that may result in downturns.

The perennial state of denial referred to above is, therefore, the ideology that sustains and legitimises neoliberal growth strategies dominated by the requirements of finance capital. Until, of course, a crisis forces a partial or complete course correction.

Consider for instance Indias stock markets, whose performance was being unambiguously celebrated when it was experiencing a boom. The Sensex closed at just above 10,000 on June 21, 2006, rose rapidly thereafter and, despite fluctuations, closed above 20,000 on December 11, 2007. This doubling of the index in less than 18 months was obviously symptomatic of a surge in speculation, driven in part by foreign institutional investor (FII) inflows, consisting largely of capital from entities such as hedge funds exploiting the participatory notes route to speculate in the Indian market. However, the flavour of the reporting at that time was to claim that the stock market was riding on strong fundamentals, ostensibly reflected in the close to 9 per cent growth the economy had registered over a four-year period.

Moreover, wealth as measured by market values or market capitalisation was not seen as just that much paper money but as an indicator of true economic strength. Newspapers were filled with stories of the rise to maturity of the Indian stock market as reflected in figures on aggregate market capitalisation, of the billionaires that India was adding to various league tables of the global rich, and of the rapidly increasing size of leading Indian firms that were now borrowing money abroad to finance new acquisitions.

Indias arrival was heralded not so much by the presence of Indian goods in world markets as by the participation of Indians in the global ownership economy and the sharp increase in the paper wealth being accumulated by individuals and firms from India.

It has not taken long for all these illusions to be dashed by the market. Between January 8 and July 8, 2008, the Sensex fell from a peak of 20,873 to 13,454, or by 35 per cent. Measured in dollar terms, the market capitalisation of Indian stocks is reported to have fallen by 46 per cent between January 1 and July 4, 2008, compared with 25 per cent in the case of South Korea, 24 per cent in the case of Hong Kong, 3 per cent in the case of Brazil and just 0.5 per cent in the case of Mexico (Business Line, July 6). Vietnam is the only country in Asia that fared worse than India, and China followed close behind India with a 42 per cent decline.

It is important to remember that China, Vietnam and India are the currently celebrated growth miracles in Asia, having displaced the East Asian NICs (newly industrialising countries) from that pedestal in the years that followed the 1997 financial crisis. Financial markets in these new growth miracles are the ones that have been talked up by international finance and the international media, leading to an unprecedented boom, especially in the years since 2003 when cross-border capital flows have witnessed a surge. And it is the financial markets in these growth miracles that are now floundering the most even though real economic growth in these countries is still better than elsewhere in the developing world.

The impact of the markets decline on the personal wealth of Indias super-rich has been on expected lines.

On January 8, there were reportedly 522 billionaires in India, many of them among Forbes listing of the richest in the world. By July 4, Business Standard (July 5) reported that the number had fallen to 421, with 101 erstwhile billionaires having experienced a 20 to 65 per cent erosion in their net worth, which had reduced them to millionaires. All because of the 35 per cent fall in the Sensex.

Those who have been worst affected (even if not damaged because their real wealth is large enough) include some of the most celebrated new capitalists of India. Anil Ambani suffered a loss that more than halved his wealth from Rs.253,567 crore to Rs.115,878 crore. His estranged brother Mukesh lost more than 30 per cent. Gautam Adani, chairman of the Adani group, took a beating that ripped 58 per cent off the value of his assets. And G.M. Rao, chairman of the GMR group, saw as much as 65 per cent of his net worth vanish into thin air.

For those who celebrated the rapid rise of the Sensex in the 18 months prior to January 2008, this collapse of stock prices, market capitalisation and paper wealth must have given cause enough to sit back and take stock. The decline in all three was not only large but extremely sharp by historical standards. What should have accompanied that fall was a sense of disquiet that was as intense as the euphoria that accompanied the bubble. This would have forced a reassessment of the so-called boom, a rethink of the policies that facilitated the speculative surge that created the bubble, and the adoption of corrective measures that can prevent similar trends in future.

But that does not seem to be the outcome. In fact, other than aggregative assessments of the kind noted above, there has been little reporting of the losses incurred in this period when financial markets were rendered more complex by liberalisation. An occasional report of provisions made by certain banks to account for exposure to sub-prime losses or a rare and unclear description of losses made in foreign exchange hedging by an exporting firm was all that one got.

But when the association of chartered accountants demands more transparent reporting of derivatives exposure in order to keep shareholders and accountants informed or when exporters from Tirupur demand the intervention of the Reserve Bank of India (RBI) to get banks to share their losses from trading in derivatives, which they claim they never understood and whose risks they were never informed of, it becomes clear that there is much that is being kept out of the public eye.

This is not because these issues are too complex to write about or explain. It is because those who can and should do the explaining are part of the unspoken consensus to keep away from the public eye these maladies that afflict the ownership economy dominated by finance. If they are reported, explained and understood, the legitimacy of the system would be under challenge. More importantly, it would force a rethink of the neoliberal policies that work unceasingly to expand profit while keeping much of Indias wage, salary and petty-income earners at the same or even lower levels of real income.

But when the crisis turns intense, as it did in many Latin American countries in the past two decades, policy reversal is a real possibility. The persisting evidence of agrarian distress, the more than 11 per cent rate of inflation, reports of declining profits and slowing sales, the widening trade and current account deficits, and the collapse in the markets that symbolise shining India suggest that India may be nearing one such turning point. The general elections, therefore, may have tipped the scales against neoliberalism. The obsession with the nuclear deal and the revival of communalism may be efforts by interested forces to divert attention and prevent that denouement.