The Crisis of Indian Capitalism

The crisis of Indian Capitalism – Part 1

The buzz created by Modi’s announcement of 20 lakh crore*/** package didn’t last long. Very next day after the theatricality of announcing meagre contents of the package in 5 tranches to make it appear bigger was done on 17th May, the stock market crashed by 1000 points. Many articles and commentators have thoroughly exposed the package which is nothing but a hodgepodge of many irrelevant announcements meant to deliver an aggregated amount of 20 lakh crore. */**

What is however much more relevant is the kind of indicators we get about the policy orientation of this government. That would help us to understand the future trajectory of Indian capitalism. its bearings on social crisis and subsequent class struggle. One of the key features of this package is its acute lack of any focus and coherent action to address the current situation. It would be tempting to lay the blame solely on this government. And no doubt it is responsible for such shabby handling of the matter. However, more importantly, such lack of any coherency characterises the acuteness of the crisis of Indian capitalism. Hence it is important to analyse current juncture from this perspective.

Policy orientation-Fiscal Orthodoxy-
Fiscal orthodoxy has been like a holy cow for neo-liberalism and held sway for almost 4 decades now. Corona epidemic has at least partly changed it and many capitalist governments from advanced countries too resorted to fiscal mechanisms to stimulate the economy. It appears different with the Modi government. The total fiscal outflow of the overall package is hardly going to exceed 2 lakh crore*/**. While a section of bourgeois economist including Raghuram Rajan called for larger fiscal measures advising government not to hesitate to even err on the side of fiscal deficit, other section strongly opposed such a view. Former Reserve Bank of India (RBI) Governor Duvurri Subbarao in his article1 in Indian Express on 15th April commented “Unlike rich countries which can throw the kitchen sink at the crisis, we can’t afford to ignore the risks of fiscal excess of that magnitude, no matter the compelling circumstances. There will be a heavy price to pay down the road by way of inflation and exchange rate volatility.” Appears those arguing for conservative fiscal approach got it their way.

Supply-side measures –
Acknowledgement of weakness on demand-side was one of the major reasons for the bourgeois economists to call for higher fiscal stimulus. Lockdown and subsequent closure of economic activity have frozen markets and demand that was already low dipped much further. The higher fiscal stimulus would boost the demand helping economic revival, they argued. Notwithstanding such arguments, the government has chosen to take supply-side measures. Excluding RBI intervention, the biggest part of the package is in the form of full or partial guarantees. Micro, Small, and Medium Enterprises(MSME) sector have been extended with a full guarantee on collateral-free loans of 3 lakh crore*/** (Rupees Three Trillion)package. Similar guarantees but partial have been extended to Non-Banking Finance Companies (NBFC) and few more sectors. Micro, small enterprises that form the bulk of Micro, Small, Medium Enterprises (MSME) have hardly any financial muscle looked for some sort of direct assistance to revive operations but nothing of that sort was promised. The overall approach of the government has been to adopt supply-side measures to facilitate and boost economic activities and revive economic output through this.

Growth through private investment –
Not just fiscal orthodoxy, but overall policy orientation as could be made out from the package is towards further boosting neoliberal policies to attract private capital and achieve GDP growth through that. Announcements in 4th tranche were specifically targeted towards this. Govt has hiked FDI limit in defence manufacturing to 74%. Privatization of six airports, opening up of more airspace, allowing private capital commercial coal mining were few more such announcements that aimed to boost the private investment. Finance Minister also announced that only a few sectors marked as the strategic sector would have a thin presence of public enterprises while for others those would be sold out. Agricultural markets system will also be opened up for private players. All these are quite major policy decisions and could have far sweeping effects. With such liberalization, the government aims to boost private investment and achieve GDP growth.

Interventions in Finance Markets –
The most significant part of the package is a liquidity injection of 8 lakh crore*/** by RBI. This forms almost 40% of the whole package. To include it in the package is, of course, deceptive as such monetary measures by RBI are very much part of the integral role of the central bank and has no fiscal aspect associated with it. Nonetheless, these are major interventions. Even before Covid-19 crisis, RBI started its operations from Feb and has been blazing with all guns since then. Through changes in reverse repo rates, Cash Reserve Ratio(CRR) limit in March, it has injected liquidity of 3.74 lakh crore*/**. Yet another unusual tool used by RBI was Long Term Repo Operations (LTRO) amounting to 1 lakh crore as targeted liquidity for investment in the bond market. It also promptly opened up liquidity tap of Rs. 50,000 crores** especially for mutual funds after Franklin Templeton closed six debt funds. Thus, RBI has been frantically intervening in financial markets to avert any crisis.

Neo-liberal Hangover –
The most conspicuous characteristic of the overall policy orientation is its neo-liberal hangover. Neo-liberalism essentially liberalized more and more sectors to boost higher investment of private capital in the economy and this in turn pushed economic growth as reflected by GDP figures. In its heyday, running economy was reduced too aggressively and successively opening up more and more sectors for private capital, turning existing public enterprises into private, offering higher incentives like tax breaks, cheaper land, labour to attract private capital to set-up production facilities and so on. It worked for most of the last decade and economies experienced a period of growth until the 2008 financial crisis. Corona has made many countries pursue different approach at least in the short term. But notwithstanding the changed global and national circumstances, the Modi government is keen to follow a similar model. Perhaps an empirical analysis of the economic indicators guided such a policy orientation. As per many bourgeoisie economists2, one of the key reasons behind the recession in the Indian economy in this decade is the constant decline in private investment as indicated by GCF (Gross Capital Formation).

(Savings and Investment ratios as % of GDP)

 Investment rate that peaked out at 38% in 2007-08 before the financial crisis has however steadily plummeted thereafter going down to 30% of GDP in 2017-18 further going down in subsequent years. And hence higher private investment would boost GDP, those bourgeois economists argue.

Another impetus for such clearly neo-liberal drive seems to be changed in the global geopolitical scenario. Corona pandemic has led to a distrust of China and there is talk of global companies looking to divert their dependence on it. This has ignited hopes among a section of bourgeois which sees this as a big opportunity for India to attract such migrating companies. In fact, it has led to a kind of economic chauvinism. Union minister Ravi Shankar Prasad called upon State governments to be proactive in attracting private investments “That opportunity for India is going to come. We have already announced many incentives and I would like that the states play a crucial role by attracting such investments,” Prasad added.3 Both central and state governments appear to have taken it seriously. On March 22, the Cabinet had approved three schemes worth Rs 48,000 crore** for promotion of electronics manufacturing in the country. Maharashtra Industries Minister Subhash Desai on 14th March announced that 40000-hectare land has been reserved in various industrial zones across the state for foreign investors and added that “Maha Permits” (quicker permits) will be provided for big-ticket industrial projects, covering all kinds of permissions that are needed to set up a plant.

Such a policy orientation towards attracting big-ticket private investment is however not new with Narendra Modi. His political rise belongs to the period of neo-liberal growth. Much hyped Gujarat model involved attracting massive private investment. He himself is the man of the neo-liberal era and it was his ability in the 2000s to attract private investment that was at the centre of much-hyped Gujarat model. After coming to power in 2014, he has often attempted to recreate the “magic”. One of his early manoeuvres was to dismantle pro-people clauses of land acquisition laws to make it investor-friendly. His first term in office too marked an array of such announcements. Make in India, Startup India and so on offered various incentives for private capital.

The structural weakness of Indian capitalism –
All this has failed miserably to turnaround the economic situation. The gigantic failure of Make in India is well known. The extraordinary circumstances caused by Corona crisis also has however changed not much in terms of policy orientation. These policies are not only mistaken in terms of their orientation. but even worse, they do not qualify as a coherent response to the monumental crisis that actually existed before Corona and was only exacerbated by it. Blame for this, however, does not belong solely to this government but is characteristic of capitalism in general. Modi government has definitely gone out of the way to ruin the economy with blunders like demonetisation, GST implementation. But the current state of economy and choices made indicate the structural crisis of Indian capitalism. As is well acknowledged, bourgeois economics utterly lacks any theory to understand its own crisis. In such a situation more than often its analysis tends to be based on an extrapolation of empirical trends. As mentioned above, one of such recurrent themes has been boosting GCF (private investment) and a section of bourgeois would look to have neoliberal policies continued towards that end.

The process of capitalist development in erstwhile colonial countries is characterised by the law of uneven and combined development theorised by Trotsky. As he explained the whole process acquires a self-contradictory character. Such a process leads to distortions specific to historical conditions under which it develops. In the case of India, one of such distortions have been uneven development of agriculture and industry. Indian industry began its development under the aegis of imperialism and its growth was stunted by the latter. However, it did develop steadily and in the first half of the 20th century, it gathered strength (in relative terms) benefiting from the war period. Agriculture, however, remained the site of primitive accumulation of capital for imperialist power for a long time till 19th century. A class of landlords was propped up by colonial masters. Capitalist development in agriculture took what Lenin termed as Prussian path resulting in mass impoverishment of peasantry. This has had significant bearings of further capitalist development even after independence. It restricted the growth of the domestic market that could further spur the development of industry and drive the process of accumulation. The Nehruvian model did expand the domestic market by a certain extent but it could not override the social relations of production. Capitalist relations came into being but not by annihilating previous caste-feudal relations but forming a peculiar combination with it. Such an alliance essentially precluded any effective implementation of the land distribution which could have paved the way for mass foundations of rural agrarian economy and growth of a mass domestic market that was critical for the growth of capitalism. Certain states like Maharashtra where strong movements against caste-feudal order took place did provide a base for industrialization. Riding on the government protection from imperialist capital, active patronage by state laying down capital-intensive infrastructure and similar policies, the accumulation process of capitalism could continue for close to two decades but no longer.

Towards the end of the 1960s, the import substitution model had come into crisis. Liberalization policies in the 1990s transformed the situation. Migration of industries from advanced countries to neo-colonial countries like India, liberalization and privatization of various sectors led to higher rates of private investment. This created demand in the market and subsequently the base of consumption widened too. However, such growth on a capitalist basis essentially leads to sluggishness in the pace of widening and after a point actually narrowing of the basis for sustainable aggregate demand. The fundamental contradiction of capitalism is that production is carried out socially by labourers but the output is appropriated individually by the capitalists. Such relations of production imply capitalist class appropriating a larger and larger share of the wealth produced and strangulating any possibilities of creating a sustainable market.

Neoliberal period of growth did not and could not address the structural weakness of Indian capitalism. Sectors like IT that grew at a phenomenal rate, at times as high as 30% year on year(YoY) growth in first 2 decades of neo-liberalism did create employment in large number though its contribution to job creation was much lesser than its share in the output growth. This was true for even other service sectors that led India’s rally to higher GDP. The employment opportunities especially decent ones like in IT did enlarge the base of urban consumption for a period but all this was too weak to ensure continuity of the process of capital accumulation. As an organic process to capitalism, the accumulated wealth with capitalist class keeps on increasing and it constantly requires new avenues of profitable investment. But profitable investment requires its products to be consumed progressively implying continuous expansion of demand which is not possible due to contradictions inherent in capitalism.

The growth of the Indian economy even in its high growth phase could not do away with such contradiction. Instead, it was pushed into the arms of finance capital to overcome it. 4 Policies of neoliberalism involved further easing out controls over capital movements and a huge influx of global finance capital rushed in generating massive liquidity in the financial system. The credit boom generated by this liquidity spurred the consumption. When looked at GDP from the demand side, it is very clear that private consumption (PFCE) has been the largest component of demand. This, however, was debt-driven consumption. The share of personal loans increased from 9% of total outstanding commercial bank credit to around 25% in 2016. 5

The role of credit was pivotal on the investment side as well. Capital-intensive infrastructure projects acquire quite an importance because of their ability to absorb the capital. The growth years on Indian economy saw massive investment into such infrastructure projects driven by credit. Now that would not be a problem in itself as long as these projects turned economically viable, generated enough revenue. But the very character of Indian capitalism meant such projects were not deployed to increase the productive basis of the economy. Instead, they were meant to serve the needs of upper-middle-class consumers. Investments into roads, airports and so on were based on extrapolation of credit-driven growth in consumption. They did not have a mass basis of consumption.

It went quite well for a decade or so and higher rates of private investment (GCF) reached its peak in 2007-08 at 38% of GDP. The global financial crisis in 2008 did impact this rally but only for a brief period. The economy continued to grow for the next few years giving rise to the kind of decoupling theory stating that the Indian economy could grow independent of global trends. In reality, the very recovery post-2008 crisis in the Indian economy was the result of the influx of finance capital in international markets caused by liquidity injection by central banks in advanced capitalist countries.

After these flows slowed down, Indian economy exited the high GDP growth phase and since then has been experiencing lower growth. From 2016, the economy dwindled further and despite the reluctance of government in acknowledging, last year, in particular, confirmed that recession had set in. A section of bourgeois may throw figures of lowering GCF (Gross capital formation) while another may seek intervention in finance market but as a matter of fact, this crisis of Indian capitalism is deeper and structural.

Financial Trap –
While neo-liberal policies brought about expansion in the service sector, their impact had been detrimental to agriculture that still employed the most significant part of the workforce and caused the acute agrarian crisis. That has made the basis of capitalist development yet narrower. Service sectors like IT that continuously generated decent employment in its heyday have slowed down. Capitalist logic of competition has now resulted in these companies to resort to job cuts, automation. And this would be irreversible. As mentioned above, despite a section of working-class attaining a higher income level, the private consumption was essentially boosted and sustained by credit injection. The structural crisis of capitalism has only worsened in this decade. Take a look RBI Annual Report in 2017 ( The report points out that the GDP growth in India has been consumption-led, particularly in 2013-14 and 2016-17. “In such a phase of growth, consumption grows faster than GDP, either in nominal or real terms, so that the consumption-to-GDP ratio increases over time, or alternately real consumption growth exceeds real GDP growth,” the reports says. Not bad, rather good, one may think. But the devil lies in details. As the report further elaborates, this increased consumption is not based on earnings, increased salaries and savings, but on borrowings from banks and lending agencies. “This apparently leads to a loan-led growth, and not growth based on actual incomes.”, the news concludes. How else it could be otherwise under capitalism? According to the Reserve Bank of India (RBI) data on sectoral deployment of bank credit, personal loans, which include home, vehicle and education loans, accounted for a record 96 per cent of incremental non-food credit in the last financial year till February 16. The trend has continued. Credit cards and personal loans recorded growth rates of 40.7% and 28%, respectively, year-on-year (YoY) in the July-September quarter of FY20. Credit card dues increased to a whopping figure of Rs. 1 lakh crore. This obviously has made the baking sector jittery. But to be sure, this is very much the making of capitalism itself. The news in Economic Times (1st April 2019) titled “A major crisis may be brewing for Indian banks” reveals how job cuts by companies are leading to individual lending turning into worthless assets.“ After blindly chasing individuals comforted by their regular income, the spectre of joblessness looms as companies such as Jet, RCom and Alok Industries undergo bankruptcy and the last bastion of banking – retail lending – is facing its worst crisis in a decade.”, it notes.

Not just personal lending but the corporate lending has been into an acute crisis for last many years. How growing Non-performing Assets (NPA) arising from corporate defaults threaten the whole banking sector is too well known to need any elaboration here. A significant portion of this has been wilful defaulters who have swindled money duping public sector banks. However, at the macro level, it also indicates the crisis of insolvency caused by declining profits below interest payment commitments. An article by Zico Dasgupta “Economic slowdown and Economic fragility” (Econoomic&Political Weekly, March 28, 2020.Vol, LV 13) elaborates how such insolvency is rooted in the structural malaise of India’s growth process. It argues that loan defaults, write-offs are merely policy mechanisms to keep these otherwise insolvent firms afloat. The crisis is not limited to the banking sector but has engulfed finance system as a whole. While credit markets are freezing, Indian companies are facing worst-ever rating downgrades by credit rating agencies. For every upgrade of rupee debt of Indian firms since April 1 there have been about 11 downgrades, leaving this quarter set to be the worst on record if sustained, according to a review of moves by India’s four main credit assessors — CARE Ratings, Crisil, ICRA and India Ratings & Research. Bond markets are extremely vulnerable in particular. Franklin Templeton closing down 6 of its funds was a big shock. Financial investors are not rolling over their investments in bonds. The crisis is not related to Corona but long persisting. Data compiled by Bloomberg in Sept last year reported that year-long debt crisis had hit the bond market hard and the sales on non-AAA bonds had halved Failure of ILFS, DHFL last year and of Yes Bank this year highlights the depth of the crisis in India’s financial markets.

Indian economy is thus caught up in a financial trap. The banking sector is broken. Financial markets are seized with a liquidity crisis. RBI is injecting trillions of rupees to avert outburst of any credit crunch to keep the markets afloat. But its monetary transmission mechanism has been largely ineffective and the massive injection has not led to banks, in turn, cutting down its lending rates granting corporates access to cheaper credit. Using an unusual tool like LTRO was in a way desperate attempt to salvage bond markets. After initial success, however, even this failed to evoke a significant response. For LTRO 2.0 it received 14 bids amounting to Rs. 12,850 crores against Rs. 25,000 crores offered.

Conclusion –
The corona crisis has hit the Indian economy when it was already in crisis. The crisis is the result of the contradictions inherent to capitalism in general and those originated in the peculiar trajectory followed by Indian capitalism in specific. The vicious financial trap it is caught in indicates the depth of it. Worse, the global financial situation is precarious, unfavourable and unlikely to turn around. On the backdrop of such a crisis, the economic package and its lack of coherent indicates the bankruptcy of the government. As the lock-down is relaxed which is inevitable, the crisis would begin unfolding over the next few months and stretching beyond. For bourgeoisie that would be in terms of figures of a dip in their profits, for bourgeois analysts, it would be GDP statistics but for working masses, it would be anything from loss of jobs to starvation up to death. While bourgeoisie would not be able to conceive, this further deepens the class crisis brewing underneath. The next article would deal with political aspects of the unfolding crisis and the need for socialist fight back.

B. Youvraj
New Socialist Alternative – Pune

* Lakh means 100000
**Crore is 10,00,00,000 (108)


References –
1) Article “Keep your powder dry”, Indian Express, 15th April 2020,
2) Article ‘Understanding India’s Economic slowdown’, R. Nagaraj,
3) News ‘Distrust against China could work to India’s advantage: Ravi Shankar Prasad”, 29th April 2020, Indian Express)
4) One can read an article “Finance Capital and nature of Indian capitalism today” by C. P. Chandrasekhar that describes the further implications of financialisation of Indian economy. It is available at
5) Same as above