Economy

Dystopian pipe dream

Print edition : May 22, 2020

Finance Minister Nirmala Sitharaman launches the rupees-dollar futures and options contracts on two international exchanges, BSE’s India INX and NSE-IFSC, at GIFT IFSC in Gandhinagar, Gujarat, through video conferencing on May 8. Photo: PTI

Migrant workers employed in factories travelling in a pick-up van at the PIPDIC industrial estate in Puducherry on May 4. Photo: s.s. kumar

The reluctance of the Narendra Modi regime to extend fiscal support to those in real need of help during a prolonged lockdown suggests that it is promoting further concentration of capital. Dire consequences await the economy and the polity.

NEARLY 50 days into the Indian lockdown, the most severe in the world according to widespread consensus, as the COVID-19 count climbs steeply, the economy continues to nosedive. The Narendra Modi regime’s unwillingness to countenance a relief and support package to sustain those who have lost their livelihoods and to prevent erosion of productive capacity has been true to type. What explains the stubborn resolve to go against the global current in which governments across the world, with widely varying ideological predilections, have thrown the kitchen sink at the pandemic while saving their economies?

There is little doubt that India’s response to COVID-19 was lethargic and muddled, especially because the lockdown was not used to bring either the disease under control or evolve a coordinated strategy to manage the economic crisis. The experience with the lockdown indicates that the government simply hoped to ride out of the crisis after the lockdown. Effectively, hope remained the only strategy for a do-nothing government that has punctiliously avoided any kind of intervention to stop the spread of the disease, stabilise the economy or provide relief to millions of Indians on the brink of starvation.

What appeared to be puzzling is slowly falling into place. And what initially appeared to be large-scale bungling, ineptitude and incompetence now seems to have been a rather charitable explanation. Instead, it is now clear that the do-nothing course is a deliberate one, in tune with the Modi government’s right-wing ideological underpinnings. This can be demonstrated by recalling a series of steps taken or not taken since the lockdown commenced on March 25, or, more pertinently, since late January, when the first case was detected, in Kerala. But first the context.

In do-nothing mode

First, the Modi regime has still not made an assessment of the extent of the damage caused to the economy because of the pandemic and the lockdown. Kerala, a State with far lower means, recently made an assessmentof the impact on the economy and on livelihoods based on the linkages between the different sectors of the economy. Thus, most estimates, including by investment banks, rating agencies and other financial institutions, appear to be instances of shooting in the dark. Such an assessment would have been eminently within the domain of a Planning Commission, but the institution was seen as part of an irrelevant “Nehruvian” past and became one of Modi’s first institutional victims after he assumed office in 2014. Only a rump now remains, in the shape of the NITI Aayog, which has proved to be not only inept but utterly non-transparent in its conduct. So, India, despite its long-standing reputation as a country with a mature statistical system, has no official estimate of the damage caused to livelihoods or the wider economy. Critically, this means that even if it wanted to provide relief, the government had no transparent guide to assess the most-affected sectors and their linkages in order to prioritise relief and support.

The second aspect of the official reaction to COVID-19 is the excessive centralisation of authority and the utter lack of coordination between the Centre and the States. Moreover, Modi’s own utterances—such as using the word “curfew” in his first speech—and the overwhelming importance given to the Union Home Ministry, headed by his most trusted lieutenant, Amit Shah—has effectively conveyed the government’s resolve to treat the pandemic-induced lockdown as a law and order issue rather than the unprecedented public health emergency that it is. The muddled handling of the crisis is best illustrated by the fact that the Home Ministry has issued more than three dozen circulars, clarifications and modifications, which has only added to the confusion. The demarcation of zones into red, orange and green districts on the basis of COVID-19 incidence can be only justified by the bizarre logic that this is the most convenient method for the Centre. Obviously, large areas of many Indian cities fall within district boundaries, and since they are classified as “red zone”, they cannot be opened up after the restrictions are relaxed. The obvious course to adopt would have been to let the States and urban bodies decide which areas to open and which to keep shut, on the basis of broad normative guidelines instead of broad brush sweeps that effectively block supply chains and extend the lockdown.

A third aspect of the government’s response relates to the abandonment of the States by the Centre. Since health is a State subject, most States are effectively seeing a surge in expenditure to tackle the crisis. Moreover, most of the States, which were under pressure even before the pandemic, have not been compensated for the “losses” they suffered under the goods and services tax (GST) regime, a promise made by the Centre when it was introduced in 2017. The States’ revenues from GST, which were already under pressure before the pandemic, fell in March. But in April, with the economy virtually shut down, most of the States only garnered 10 per cent of the revenue they earned last April.

The burden of providing “relief”—whether towards bus and train fares for migrant workers and stranded travellers to help them get back to their homes or for provision of food and shelter—was passed on to the States, stretching their finances further. To top it all, the Centre has not only been unwilling to provide grants to States to meet the emergency expenditures, but has been unwilling to explore other options. It has maintained a stoic silence to States’ demand that the ceiling on their borrowing limits be enhanced in order to enable them to borrow from the market. In fact, Kerala was forced to borrow at very high rates—almost 9 per cent—to meet its expenses. Even if the Centre was only willing to countenance a market-based approach such as this, it could have allowed States to borrow at the repo rate (the rate at which the Reserve Bank of India lends to banks). After all, if the repo rate-based low-interest loan can be accessed by Reliance, Tata Steel and other such large companies, why not sovereign institutions such as State governments? It is clear that the extreme and illogical resolve to squeeze State finances is driven by the craving for excessive centralisation of authority and reducing the States to remain junior partners in the Indian federation.

Not merely fiscal fundamentalism

It is obvious that the pandemic has induced a shock like no other in the history of capitalism. Both demand and supply have collapsed simultaneously, implying that the standard business cycle theory is utterly useless in such a situation. India is no exception to this crisis. The first reaction in most countries has been to provide relief—especially to those vulnerable to the disease and those hardest hit by restrictions imposed by the lockdown or the extension of the lockdown. But even this is evidently not enough. The suspension of economic activity requires a State-led propping of demand in the economy because private institutions would be unable or unwilling to do it at this point. Propping up demand does not mean simply providing monetary relief, as advocates of the more fundamentalist line have implied by caricature. It means prioritising spending in areas that are likely to spark a wider recovery; this implies obviously exploring the linkages in the economy to identify sectors that would generate more value for the buck in terms of boosting a quicker and more durable recovery. But even this is only a half-measure. The response to the pandemic has meant that large swathes of the productive capacity in the country are in danger or are already on the verge of bankruptcy. This is especially true of small industries, which are, in some respects the true engines of the economy. Moreover, they are a critical part of most sectors—from automobiles to chemicals and textiles, for instance. In effect, if they collapse, chains of production across most sectors of the economy would be unable to function. Large industries that have used outsourcing as a means of evacuating the uncertainty of market risks from their balance sheets would now be unable to function without these critical supply chains.

This means that a rational sequencing of the policy response to the economic crisis would be relief, injection of a fiscal-induced demand, followed by extended support to small and large industries in order to keep supply lines running and preventing a contagion from taking effect. That this has not happened was surprising from the start. What is the explanation for this? The initial explanation that this arose from ineptitude and incompetence, now appears, in hindsight, to be the more charitable deciphering of the puzzle. The recent actions of the Modi government and its sullen refusal to provide succour indicate that a far more insidious objective may be guiding its actions or inaction.

RBI liquidity infusion package

The first, and the only package, announced by Finance Minister Nirmala Sitharaman on March 26 was a paltry sum; the sleight-of-hand lay in the fact that a large proportion of the “package” was merely front loading of expenditures already announced in her Union Budget on February 1. The real thrust of the government’s intent was revealed the following day when the RBI announced a liquidity infusion package amounting to Rs.3.74 lakh crore. Among these was the targeted long-term repo operations (TLTRO), which was supposed to act as a means of providing funds for working capital-starved companies at relatively low repo-linked rates for up to three years. Banks were thus expected to lend to firms that had lost access to liquidity because of redemption pressures in the equities, bonds and mutual funds markets.

The increase in liquidity with banks has, however, resulted in two adverse consequences, exactly the opposite of what was given out as the rationale for the whole exercise. First, there has been a spectacular surge in outstanding amounts in the reverse repo facility—which enables banks to park funds with the RBI. Between February 1 and May 1, the outstanding amount in the reverse repo rose from Rs.1 lakh crore to about Rs. 8.5 lakh crore. What does this imply? Simply put, this means that banks were willing to suffer a small loss by parking funds in the reverse repo facility rather than lend more to borrowers who they perceived as risky.

But the second aspect of the liquidity injection is more interesting. It turns out that most of the lending under this facility went to those companies that were in the least need of emergency funding via the corporate bond market. Three large Indian companies—HDFC Ltd, Reliance and Larsen and Toubro—managed to access almost 39 per cent of all non-convertible debentures floated under this facility in April. Six of the top 15 bond issues under this facility were to large private corporations, accounting for 47.46 per cent of all issues amounting to Rs.85,232 crore. This massive concentration in lending, at a time when the entire exercise was justified in the name of enhancing availability of liquidity to productive actors in the wider economy is reflected in the fact that almost nothing from this facility reached issues that were rated below AA. In effect, smaller companies have been shut off from this measure undertaken by the RBI.

Anecdotal evidence available from banking industry sources indicates that banks, under pressure from the Finance Ministry and the RBI to lend more, are asking their prime clients to borrow even when they do not need fresh loans. In order to satisfy the Ministry and the regulator, they are asking these clients to seek enhanced borrowing limits even if they do not actually use them. “The idea is to show that we have complied, even if it does not mean a single rupee more than is actually lent,” an officer of a public sector bank told Frontline. As the surge in the reverse repo shows, banks appear to be inclined to park funds in relatively low-interest-bearing instruments rather than extend loans to risky customers. This raises a fundamental issue about using banks as a vehicle to kickstart a recovery from a unique crisis such as the ongoing one. Essentially, the idea of using a market-based approach when markets have all but disappeared as the economy is at a standstill is fraught with serious contradictions. This is reflected in the reluctance of banks to lend to those entities that need funds to remain afloat during the current crisis. The continued portrayal of the ongoing crisis as one that is tied to liquidity logjams is a misrepresentation of reality. In actual fact, large sections of the workforce engaged in industries as diverse as garments, construction and automobiles have not received wages or any relief at all. These companies need access to working capital on an immediate basis and perhaps more to prevent a collapse following bankruptcy. This is not about individual firms and their liabilities but about preventing a wider contagion across the ecosystem in which these industries exist.

Driving concentration

An internal note circulated in the government, and accessed by Frontline, reveals that there is no move to mount a salvage operation by using the fiscal deficit. As far as the micro, small and medium enterprises (MSME) sector is concerned, apart from providing enhanced working capital limits and some relief via lower interest rates nothing is planned. The exclusive reliance on banking channels to provide this relief is bound to fail. There is no evidence that the Modi government is considering this at all. The reluctance to use government guarantees to ensure funding, which small industry associations have been clamouring for, is particularly striking. In short, the writing is on the wall for smaller Indian companies.

If this logic of letting the small perish is pursued to its logical conclusion, it will have devastating consequences for the overall economy. MSMEs account for about one-third of the national GDP, and about the same proportion of all manufacturing output. They account for about one-fourth of all employment and a little less than half of Indian exports. Even in the best of times many of them have been junior partners with large industry, which has only been parasitic, never clearing their bills in time, thus straining their working capital requirements. As a result of the lockdown, many have been saddled with inventories and by non-payment for supplies already made, while they continue to bear rent, electricity and wage costs. The unwillingness to look at fresh ways to deliver immediate support to this segment of industry—for instance, by using the GST Network to identify firms and adopting some normative standards—does not appear to be merely unimaginative. Instead, it appears that this section has been forsaken on a whim. In fact, the contagion, if it takes effect, will not remain confined to small businesses, many medium and large companies may go bankrupt too. The government appears to be inclined to let the assets of these companies be liquidated by banks that will convert their loans into equity.

The callous manner in which migrant workers have been treated suggests that a more insidious motive may be at play. In Karnataka, for instance, the Bharatiya Janata Party (BJP) government headed B.S. Yediyurappa first announced that migrants would be allowed to leave on trains for destinations in other States. A day later, after a meeting with heavyweights of the real estate lobby, he did a somersault. The real estate magnates justified it by claiming that the starving workers would be better off. The agitated workers, of course, would have none of it. How could they trust the same industrialists who had let them bleed for 40 days? they asked.

Under pressure from workers and trade unions, Yediyurappa did another somersault and agreed to let them proceed. Each of these workers paid at least Rs.970 towards travel expenses to destinations in Bihar, including an obviously exorbitant fare of more than Rs.100 for travel within Bengaluru city. K.N. Umesh, secretary of the Karnataka unit of the Centre of Indian trade Unions, said: “None of these poor and desperate workers even bothered to collect the Rs.30 that was due to them [after paying Rs.1,000 each].” He was at the railway station on May 8 when the migrants boarded the trains.

But even after the trains, which were scheduled to depart between May 8 and May 15, had left, lakhs of migrant workers still remained. It is clear that both the government and the industry like to use the lockdown and the conditions of the pandemic to keep workers caged so that they can be put to work, against their will. This mindset is revealed by the recent moves by Madhya Pradesh and Uttar Pradesh to drastically amend and rescind labour protection laws that date back to the time of Indian independence and even earlier. Madhya Pradesh plans to suspend the provisions of the Factories Act, enabling working hours to be extended from 8 to 12 hours a day, effectively a 72-hour week for workers. Uttar Pradesh has passed an ordinance suspending many of the labour laws, barring those obviously incompatible with scruples of modern civilisation such as those abolishing bonded and child labour. Industries in other parts of the country, which are demanding to be freed of all accountability following relaxation of the lockdown in parts of the country, are demanding that these laws be suspended. Under the pretext that foreign companies wishing to relocate from China are queuing up to come to India, the government appears to be sending out signals that it is in a mood to accommodate.

The initial reaction to the Modi government’s decision to stand apart from the world by not extending a substantive relief package appeared to suggest that it was grossly unprepared and that it dragged on leaden feet. The stubborn resistance, despite appeals from several quarters, including several leading economists, suggests that its actions are by design, not arising from lethargy or incompetence. It suggests that its ideological predisposition makes it incline towards a neo-Malthusian outlook or even one that is of social Darwinism in vintage. It will be perfectly compatible for such an outlook to imagine that the small is equal to being inefficient or that consolidation is indeed desirable.

The suspension of the most basic of legal protection for labour, which trace their origins to the struggle for national independence, is in line with such a line of reasoning. In effect, this outlook seeks to promote the naked advance of the consolidation and concentration of capital. A clue to its approach is provided by the Modi government’s conduct since the demonetisation of 2016. In effect, its approach to the pandemic is part of a continuum in which demonetisation and the implementation of GST were merely stops on a journey.

It is not clear whether Indian capitalists understand what is unravelling. Such a large-scale collapse of industry, especially small industries, will destroy India’s productive capability. But who is to call out this dystopian pipe dream?

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