India must look after its own interests first

By Ashok Mitra

Hell has finally been let loose. It may look like the end of the capitalist order to those done in by the holocaust. Capitalism, with its feline features, has however proved it has more than nine lives. What is more legitimate to claim is the end of the officiousness of the ideology of laissez faire, which has for this long buttressed capitalism. Recent weeks have decisively settled the issue: the so-called free market does not raise human welfare to its highest possible level, allowing the animal spirit in man to roam unfettered does not lead to either an equilibrium of bliss or to the emergence of a just society, the animal spirit actually wraps within itself such evils as greed, envy, ill-will, skulduggery and a fearsome lack of moral principles.
Since luminaries from the United States of America were the most vocal votaries of the free market, it was almost inevitable for that country to be the first and severest victim of the catastrophe that has set in. The long, dismal procession of financial collapses, insolvencies, take-overs and whining pleas to the government to bail out the wrongdoers — and those at the receiving end of their wrongdoing — is almost a re-run of the Great Depression. Quite a few of those at this moment importuning with the begging bowl were, till yesterday, holier-than-thou specimens. In that sense, it has been a great leveller: the high and mighty mortgage financiers Fanny Mae and Freddie Mac, for more than a century the majordomo in investment banking Lehman Brothers, other investment banking giants such as Morgan Stanley and Goldman Sachs, the grand insurance conglomerate, the American International Group; the mega stockbroker Merill Lynch, have all bitten the dust. The individual tales of how they came a cropper have their specific nuances, but the basic malady is the same: overreaching ambition goading those in charge of these institutions to cut absurd corners. The entire American nation has now to pay for the sins of a collection of private sharks, big and small. Because over the past decades so much gibberish has been talked, and listened to, on the necessity of financial integration on a global scale, Europe — and Asia too, at least partially — are also at panic’s door. What in the jargon is known as the elasticity of expectations has gone haywire: since people expect the market to crash, the market is crashing — and keeps crashing — all over.

Hard times call for hard decisions. Whatever the wrench in the heart, dogmas have to be thrown into the wastebasket. Can you believe it, George W. Bush presenting himself before the world’s media and thundering in no-nonsense terms: the government must intervene in the affairs of the economy? The free market is officially buried. The State must reassume centre-stage, the treasury and the federal reserve board will be handing out rescue money right and left in order to save banking and non-banking institutions alike. Even when such entities have gone bust entirely on account of devious doings on their own part, State generosity will not be denied. After all, the survival of American capitalism is at stake. Saving a crooked and corrupt Wall Street is saving the capitalist order.

At the same time, it is being rubbed in even to the thugs in trouble, there is no free lunch. The US Congress, representing the American nation, has assumed the role of a stern taskmaster. State agencies will henceforth oversee and regulate the activities of institutions receiving government bounty. In some instances, such institutions — including banks — will have to part with a segment of their equity to these agencies, a euphemism for semi-nationalization. That is to say, American capitalism, in sackcloth and ashes, has agreed to the shackles of a regulatory regime. Even salaries and perquisites going to the executive personnel of quite a few fund-receiving institutions will be subject to public scrutiny. Margaret Thatcher’s Britain, equally hard hit by the blowing typhoon, has gone even further, to the extent of nationalizing, in full, some of its largest banks.

Will the message reach the shores of India, where the authorities, bewitched by liberalization, have been obstinately anxious to integrate the domestic financial market with miracle-making Wall Street? Render unto Caesar what belongs to Caesar: it is only determined resistance by the Left which has stood in the way of a greater exposure of our financial system to American banks and insurance firms. Notwithstanding that piece of luck, share prices here are behaving like Nervous Nellies. And this for a solid reason.

Short-term capital funds from abroad have parked in our stock exchanges in substantial quantities. Foreigners have purchased a sizeable slice of equity of not only many Indian industrial and commercial ventures, but of some of our leading banks as well. If, because of uncertainties originating in the US and Europe, these equity investments are withdrawn at an extraordinarily fast pace, it could cause a debacle in both share prices and our foreign exchange holdings. The nervousness on our bourses is largely on account of contemplation of that prospect, which can be avoided only if the authorities, without losing a moment, re-clamp restrictions on capital movements on the current account.

The neo-colonial grip on North Block is yet to slacken. Even as both Sensex and Nifty show signs of a free fall, the prime minister, his finance minister and their cronies persist in glib talk about the “strong fundamentals” of the Indian economy, a copycat version of the assertion of the US Republican presidential candidate, Senator John McCain that the American economy is “structurally sound”. Hope is being pinned exclusively on providing additional liquidity to participants in the share markets. Official verbiage continues to avoid mentioning the most crucial fact though. Foreign institutional investors at present hold around 70 billion US dollars —equivalent to Rs 350,000 crore — in Indian stocks, including equity of major banks and corporate bodies. If worst comes to the worst, foreigners could all of a sudden begin to sell short, dump these stocks, take their pickings and depart from the scene. The consequences could be frightening for share prices, the external value of the rupee and the country’s foreign exchange reserves. The Reserve Bank of India’s pump-priming would be hopelessly inadequate in that kind of a situation.

Is not what is immediately called for is, if not a total ban, at least a strict regime of controls, on taking short-term capital out of the country? Those at the helm of our affairs, overly concerned about possible negative reactions from their patrons in Washington DC to exchange control proposals, would like to perish such a thought and mumble inanities like the necessity of a global solution to a global problem. But the rude fact will not go away: finance ministers of the Western countries will lay stress on solutions which save their own skin; India and other developing countries are not at the top of their agenda.

What should worry our policy-framers is that, in case, while they do nothing, foreigners scoot with their loot, the stock markets collapse, foreign exchange assets shrink and some of the banks go under, the so-called “fundamentals” of the economy might cease to stay “strong” for any length of time. To cling to the notion of globalization together with liberalization leading us to an Arcadia would be plain silly in this season. The Americans and the Europeans are taking care of themselves, and have returned to the shelter of the State. In our country too the State has to step in and choose the most efficacious instruments, including those which foreigners disfavour: our own interests should precede the interests of foreigners.

The town cynic would conceivably chip in here. He would contribute a further argument against financial accommodation to save speculators in the stock markets. Why not let those who live by share prices, he would suggest, die by share prices too? After all, they constitute at most three per cent of the national population. Why not invest the money for an alternative purpose, for bettering the lot, for instance, of the agrarian community, which makes up close to two-thirds of the nation? That would, he would add, contribute much more towards strengthening the “fundamentals” of the economy.
(Courtesy: The Telegraph, Kolkata)
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