The Praful Bidwai Column
No alternative to state intervention
Save their jobs.
SUCH is the grip of neo-liberal or free-market dogma on the minds of its Indian adherents that they deny there's a grim global financial crisis and economic recession. Indeed, some say the collapse of banks and the general economic slowdown in the West represents the birth of a new, vibrant, free-market capitalism. One commentator concedes this is a crisis of neo-liberal globalisation, but asserts this could be globalisation's "finest hour." Neo-liberals want to raise foreign investment caps in many sectors, dismantle labour protections, free the entry of foreign banks, and go for capital account convertibility (CAC). Such exuberance is surreal when stock-market indices have has fallen by one-half, banks are extremely nervous, and industrial growth has plummeted to 1.3%. Such mindlessness stands in sharp contrast to the frank admission by US policymakers of neo-liberalism's failure and the need for extensive state intervention. Even Alan Greenspan, former US Federal Reserve chairman, admits that his faith in self-correcting markets was misplaced. Mercifully, many Indian policy-makers acknowledge that the cause of the stock-market crash is the withdrawal of $12 billion by foreign institutional investorsa factor related to the global crisis. Had India gone in for CAC, the economy would have totally collapsed. The Reserve Bank has infused liquidity into banks by repeatedly cutting their cash reserve and statutory liquidity ratios, and reducing the interest rate at which it lends money to them (repo rate) by 1.5% to 3.5% points. This has funnelled a substantial Rs. 260,000 crores into the financial system. The Finance Ministry hopes this would enthuse banks to lend to cash-strapped businesses, and prevent a slowdown. But this hasn't happened. Banks are wary of lending even to well-established companies, or to one another. Last week, the overnight inter-bank borrowing rate was 21%! This is not because banks are short of funds. They have sucked in long-term fixed deposits. Some are so flush with funds that they're lending hundreds of crores to the RBI at the 6% "reverse repo" rate. The reason for banks' lending aversion is that they can't evaluate risks and default probability as industrial growth slumps and major projects are abandoned. This has happened in the core sector and in real estate, pharmaceuticals, civil aviation, metallurgical production and information technology. The realty market is so depressed that some developers are offering a car free with every flat. Meanwhile, profit margins continue to shrinkby as much as 35% over a year for 1,348 large companies surveyed. Reports are pouring in of depleting order-book positions, an export slowdown, and corporations' layoff plans. A survey of small enterprises reports a 20% to 90% decrease in orders for leather goods, a 10% fall in textile exports, a 20% decrease in orders for auto components. Hosiery exporters are offering discounts of 35%. Exports of polished diamonds, which fetch Rs. 70,000 crores, are in the dumps. Even worse affected are craftsmen. About 20% of Meerut's 30,000-odd goldsmiths have left. Moradabad's highly skilled brass-workers have taken to plying cycle-rickshaws to survive. A chamber of commerce estimates likely industrial job losses at a stunning 25% to 30% over the coming year. This report was considered alarmist. But other surveys paint an equally grim picture. A CNN-IBN poll says 79% of respondents believe there's an economic slowdown, and 47% are worried about job losses. Polls apart, economists using Planning Commission numbers have forecast that GDP growth will fall this year by 2 percentage points to 7%, and some 2 million jobs will be lost. Especially vulnerable will be unorganised sector workers, who account for 93% of India's workforce and neither enjoy employment security nor earn a living wage. Such a massive loss of livelihoods is unacceptable and morally indefensible. Given the near-total absence of social security in India, it'd mean mass destitutionand great human suffering for no fault of the workers. Clearly, what India urgently needs is state intervention addressing substantive issues of production, income and employment. The government must take four different initiatives. First, directed lending. It should ask banks to lend on a priority basis to the core sector and to employment-intensive small industries, with guarantees of making up losses. This will help revive production and prevent unemployment. Second, there must humane labour law sreform to prevent hire-and-fire practices. Where redundancies become absolutely unavoidable, approaches that avert layoffs must be adopted, including shorter working hours, pay reduction with guaranteed sustenance income, liberal leave, and flexibility for contractual assignments. Factories employing 50 or more workers must seek government permission before laying- off anyone. Third, the government must launch a massive social security scheme, including an unemployment allowance, subsidised healthcare, education, and retraining in skills, and pensions for old people, widows and the disabled. This must include large-scale public works programs, and a strengthening and extension of the National Rural Employment Guarantee Act to urban areas. Finally, we need an incomes policy to reduce the astronomical earnings disparities between the poor and the very rich. This means raising minimum wages across-the-board, especially for menial jobs. It also means having a ceiling on incomes, and higher taxes for the rich. India committed a blunder in 1994 by abolishing ceilings on managerial salaries. This has further fattened corporate Fat Cats, some of whom take hundreds of crores in salaries, commissions and bonuses even as their companies' profit margins shrink. This must be reversed. It's unlikely that Dr. Manmohan Singh will do this willingly. His instinct is to seek solutions from those very Fat Cats who are part of the problem. He has also appointed ex-IMF neoliberal economist Raghuram Rajan, a CAC votary, as an "honourary" economic adviser. Dr, Singh will have to be pressed to change course through advocacy, political lobbying and mass agitation. But there's no alternative if we want to cope with the crisis and turn it into an opportunity to build a minimally decent, humane and inclusive society through prudent state intervention.
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