Financial liberalisation exposes the country to the tyranny of international finance, which is not only anti-democratic in an obvious sense, but is even counterproductive for growth.
PRABHAT PATNAIKIT is remarkable that while the threat to democracy posed by the proposed constitutional review has been widely appreciated, the fact that the Budget for 2000-01 announces measures which would restrict democracy even more effectively than what the Venkat achaliah Committee can ever plausibly do, has gone largely unnoticed. And yet that is precisely what the effect of its financial liberalisation measures would be.
Take for instance the proposal to give autonomy to the Reserve Bank of India. This would mean that the entire gamut of policies relating to monetary and exchange rate management would be taken out of the purview of political control and handed over to a body that would be accountable to no one, and certainly not to the people of the country. Political control entails parliamentary control; it therefore entails, indirectly and however imperfectly, a measure of accountability to the people of the c ountry. The essence of democracy consists in enforcing this accountability to the people. Granting autonomy to the Reserve Bank would eliminate this.
Some may ask why if the prices of vast numbers of commodities remain outside the purview of government control (save in exceptional cases when the government has to intervene, and that too indirectly through supply management measures), the interest rate and the exchange rate, which are just two prices, should be subject to such control. The answer is simple. The interest rate and the exchange rate are two very special prices, which have profound macroeconomic implications, impinging on the people's liv ing standards. The autonomy of the Reserve Bank therefore means that decisions affecting the people's living standards are henceforth to be entrusted to a body that, even in principle, is not accountable to the people.
This is not just a formal point. An autonomous body entrusted with the management of the interest and exchange rates would naturally seek to achieve stability in both these markets by ensuring that the "confidence of foreign investors" remains uni mpaired, that is, internationally-mobile speculative finance capital is kept appeased. This means two things: first, it would have to have a say in all domains that have a bearing on speculators' confidence, including fiscal policy, trade union rights, a nd even the political sphere; and secondly, it itself would have to be run by persons who inspire maximum confidence among the international speculators, such as ex- or current World Bank employees, ex- or current IMF employees, or those enjoying these o rganisations' confidence. In short, it would be the international financiers who would virtually run the country and not (however indirectly) the people, as democracy entails.
Measures such as granting autonomy to the Reserve Bank therefore amount to a veritable coup d'etat carried out by international financial interests against democratic governance. It is not surprising that this is a demand systematically made on al l countries undergoing "structural adjustment".
SOME may ask: what is wrong with this? If an autonomous central bank, by generating "investors' confidence", can attract larger capital flows, then so much the better. Why should we forgo this opportunity by entrusting control over the central bank to a bunch of dubious politicians in the name of "democracy"? After all, countries like the U.S. have central banks that are autonomous, and they have done well in terms of economic performance; why should not we too follow in their footsteps? This view fails to distinguish between speculative capital and productive capital, between "hot money flows" and foreign direct investment. It is only the latter that can contribute to growth, and that too if it does not supplant already existing domestic production bu t adds to such production by being oriented towards the export market which in many instances is beyond the reach of existing domestic producers. Speculative capital inflows do not per se contribute to growth. On the contrary, since an economy open to su ch flows has to be concerned with speculators' "confidence", which generally demands the pursuit of deflationary policies, growth suffers as a result of such openness. What is necessary for growth, therefore, is to encourage the inflow of the right ki nd of foreign direct investment while closing doors, or at least controlling, the inflow of the wrong kind of foreign direct investment and, above all, of speculative capital flows. This requires conscious political intervention; an autonomous centra l bank run by a bunch of financial bureaucrats, recruited typically from the stables of the IMF and the World Bank, would obviously never enforce any such discriminatory controls.
The examples of the United States and the United Kingdom are grossly misleading in this context. The Anglo-Saxon world is the home base of international finance. In a world where finance is left entirely free to move all over the globe, it would tend to gravitate to the Anglo-Saxon world as a matter of course, and, from that base, make forays elsewhere, wherever opportunities for quick gains present themselves. The gravitation of finance into these countries creates job opportunities in the financial se ctor that are massive compared to the size of the home population (for instance, the U.K.), or generates spending booms (for instance, the U.S.). In countries like India, by contrast, openness to financial flows has the opposite effect of enforcing defla tion, and hence stifling growth, because finance has to be enticed not to leave our shores. What is sauce for the U.S., therefore, is not sauce for India.
This is precisely the argument against financial liberalisation in India. It exposes the country to the tyranny of international finance which is not only anti-democratic and anti-people in an obvious sense (the latter via cuts in subsidies and social ex penditures), but is even counterproductive for growth. The Budget, however, marks a major step towards financial liberalisation. The proposed autonomy for the Reserve Bank is one component of it, though a striking one; but there are others.
Public sector banks are to be privatised by reducing government equity to 33 per cent in accordance with the recommendations of the Narasimham Committee. (The Finance Minister's claim that "this will be done without changing the public sector character o f banks" means nothing, since private, including foreign, financiers can hold shares through nominees; indeed the same Narasimham is on record as wanting these banks to have one-third government, one-third foreign, and one-third Indian private equity.) I ndian capitalists would be allowed to export finance capital for taking over companies abroad, and hence, in general, for speculative activities on stock markets elsewhere. Metropolitan finance capital, in the guise of Foreign Institutional Investors, wo uld be allowed up to 40 per cent equity in Indian companies, enlarging the scope not only for a "denationalisation" of Indian industry but also for a bunch of foreign speculators to dominate the sphere of production. Major concessions, including tax conc essions, would be offered to financial firms specialising in providing "venture capital", that is, high-risk and speculative investment.
THESE measures of financial liberalisation, in their totality, entail three basic changes: first, the removal of the financial system from the ambit of public accountability; second, the elimination of the subservience, in principle, of the financial sec tor to the needs of the productive economy, and the conferment upon it of the kind of autonomy that allows speculation to take precedence over production; and third, the removal of the insulation from the vortex of financial flows that India's financial system has enjoyed till now. (Though this insulation was being undermined during the liberalisation era, the present move carries it far forward.)
These are fundamental changes. The economic regime set up in India after Independence, which had planning, self-reliance and sovereignty as its cornerstones, had erected a financial system appropriate for this purpose, involving public control, public ow nership and public accountability. International finance capital has been trying assiduously to destroy these features. The Finance Minister's announcements show that it is succeeding. Not that this single Budget would change the entire system at a strok e, but its direction is clear, unmistakable, and dangerous. By pursuing the path of "financial liberalisation" which the Budget unfolds, not only would we have "Wall Street Capitalism" (which even economists advocating "liberalisation" deride) figurative ly imported into India, but India would get attached to Wall Street Capitalism in actuality.
The overall thrust of this Budget is marked by an anxiety to please metropolitan capital even as it shows remarkable unconcern towards the interests of the nation. This is apparent from the fact that it lowers customs duties while at the same time raisin g excise duties (a sure prescription for de-industrialisation), from the coercion exercised on all State governments to carry through power sector reforms as desired by the World Bank, and from the virtual demolition job it carries out on the public dist ribution system. Opening up the economy to the tyranny of international finance capital betrays the same thoughtless subservience.
Prabhat Patnaik is Professor of Economics at Jawaharlal Nehru University, New Delhi.
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