It was Karl Marx
who enriched humanity by developing the scientific methodology of historical
materialism to analyse the system of social production. But even ancient Greeks
in the time of Aristotle knew that no value could be produced without employing
human labour. Capitalist owners, shareholders, managers and their courtiers from
the ‘intelligentsia’ only partake in the surplus appropriated from the value
produced by workers, they themselves do not add any value to the stock of
social wealth. Hence only the naïve and simpletons were applauding when,
instead of deploying the strategy suggested by medical science, extensive screening
and testing with quarantining and isolation of infected in massive public healthcare
facilities to be urgently created for this purpose, complete and forced lockdown
was imposed by the central government as the primary method to deal with
Covid-19 pandemic. Those participating in this comic applause and beating of
pots and pans imagined themselves to be now safe, behind the high walls of
their gated colonies and apartment ‘societies’, from the danger of Corona
infection that will now feed only on the working-class multitudes in the filthy
congested urban slums.
Neo-Liberal
Economic Policies
All the more so as
the Covid-19 pandemic has struck the humanity at a juncture when already
moribund and crisis ridden capitalism has been dismantling even the modicum of
public healthcare facilities existing earlier by giving full play to neo-liberal
economic policies of privatisation, minimal public regulation, handing over of
all natural resources to capitalists at throw away prices, lower rates of
direct taxes, ‘austerity’ in expenditure on common public facilities for
education, healthcare, housing, transport, etc during last 4 decades. This
freed capitalists from all shackles on intensification of rate of exploitation
through extracting both relative and absolute surplus value at increasingly
higher rates. This is driven by consistently raising the organic composition of
capital, especially through very high amounts of investments in fixed capital
component of the constant capital, reducing the proportionate requirement of
employing variable capital or labour power per unit of output. This has
resulted in a huge reserve army of unemployed labour.
On the other hand,
this has ‘freed’ most workers from whatever minimal protection of labour laws
and collective bargaining under trade unions they had. Overwhelming majority of
the workers now work under so-called ‘zero-hour’ contracts, getting paid wages lower
than the value of their labour power under the weight of huge supply of labour
compared to demand, paid only for the specific time worked with no regular employment
or wages, no labour laws, no fixed working day, no insurance or health
check-up, no compensation for accidents, ‘free’ from all shackles in serving
the interests of the super profits of the capitalist class. Hence, while
capitalists have accumulated immense amount of wealth, more and more workers
are being pushed into pauperization.
Existing Crisis in
the Capitalist Economy
However, as Marx
explained, since all value addition in production process comes from variable
capital or labour power employed, the proportionately lower quantity of
variable capital employed per unit of output produced, the per unit surplus
value or the rate of profit on per unit capital also tends to decline. But the
increased unit sales at lower price counteracts this decline in rate of profit
and the total profit can still be higher. However, soon the higher supply of
production at lower value by all the capitalists chokes the market resulting in
the crisis of overproduction.
Here an additional
factor, loan capital, comes into play since the huge investments in fixed
capital usually come from capital loaned by banks/financial institutions to
industrial capitalists who need to pay interest on loan capital. This interest
comes out of the surplus value appropriated by the industrial capitalists on
total capital, i.e., they pay a part of the total profit extracted to the banks.
However, when the sales decline because of overproduction either the industrial
capitalists reduce production by operating at lower capacity utilization or
produced commodities cannot be sold. In the first case, total surplus value
appropriated by capitalist itself declines. In the second case, they cannot
realise the amount of surplus value embedded in commodities produced, i.e., it
cannot be transformed into money capital by completing sale of the commodity.
In both cases result is loss or reduced profit insufficient to cover the amount
of interest payable to banks on capital loaned by them. This results in
bankruptcies of many capitalists, as a result of which either they are
liquidated or gobbled up by larger capitalists. Along with this the crisis
spreads to the banking/financial system as part of the already loaned capital needs
to be written off and more capital cannot be loaned because of the uncertainty
of creditworthiness as the banks are not sure which of the borrowers will
survive the crisis. Hence, there might be a situation when markets are
overstocked with goods unable to be sold and banks are full of money unable to
lend.
Crisis in Indian
Economy
This same process
has been in motion in India since the neo-liberal policies were first initiated
in the 1980s and then accelerated 1991 onwards. Huge amount of capital
investments in constant capital especially its fixed component has been made
since then while the value of variable capital has declined proportionately. During
this period total corporate borrowings have sharply increased from
approximately 10-15% of the then GDP to approximately 60% of the present GDP.
After several smaller crises, this ultimately resulted in severe financial
crisis in 2008 along with the global financial crisis. At that time ruling
class strove to avert this by increased government expenditure as well as
nudging public sector banks to make huge loans to the construction and
infrastructure sector – roads, ports, commercial real estate, housing, etc and
creating an asset price bubble. However, by 2011 this created more intense
crisis which among other things prompted Indian capitalist class to opt for the
rule of fascist party. But that has not helped to resolve the crisis and it has
been further exacerbated by Demonetisation and implementation of GST.
So, in brief, what
was the condition of the Indian economy when the Covid-19 pandemic struck?
Severely inadequate aggregate demand in the economy, very low capacity
utilisation of the already installed capacity for nearly a decade (in the range
of 65-75% per RBI monetary policy reports), huge drop in profitability of
capital, lengthening of the duration of circuit of capital as the period of
circulation extended, large number of companies not able to cover interest
payments on borrowed capital from their operational profits, sharp decline in
further investment in new fixed capital formation, and as a result, banks as
well as other financial capitalists sitting on huge amounts of accumulated
money capital unable to deploy it in productive capital (historically low rates
of expansion of bank credit to industry), hence huge increase in financial
speculation. Simultaneously government fiscal deficit reached sky high as, one,
government sought to keep growth rates high by increased government expenditure
during past few years; two, huge amounts of tax and fiscal reliefs/incentives
were given to capitalist class; and, three, tax collections growth first
stagnated and has then gone down absolutely in a stagnating economy. Hence,
even the central government now finds it difficult to provide any fiscal ‘stimulus’
to the economic cycle, fully dependent on monetary authority for action. Another
factor is almost bankruptcy of the state government finances.
Why Lockdown?
It was in this
crisis ridden situation that the government, even with sufficient advance
notice, found itself in no position to take the advice of its own scientific
and medical advisors for adopting the appropriate scientific approach of
dealing with the pandemic – extensive screening and testing of potential
infected persons, identification of confirmed cases, their quarantining/isolation
and medical assistance in serious cases in urgently built massive public
healthcare facilities and to provide adequate safety equipment for the
healthcare personnel. Moreover, Modi’s penchant for spectacular decisions,
instead of painstakingly tedious but patient work, to project himself as a
‘superhuman’ leader and statesman also pushed him to declare a complete
lockdown of common people and all economic activity, enforced by brute police
power without caring a hoot for the livelihood of poor masses and providing for
any measures to alleviate their suffering.
Impact of the Lockdown
on Working Class
However, in
capitalism working class has no means to live but to sell their labour power. Whole
of their income is equal to the wages paid to them by capitalists in return for
selling their labour power. They have no property, no financial savings at all to
fall back upon as the value of their labour power is no more than the value of
minimum commodities required by them to live and reproduce the labour power
every day. Even with minimal spontaneous class consciousness workers know this and
saw the dire crisis of stark starvation facing them since, in the cities, they
need to pay for rent, electricity and even for using toilets in addition to the
basic food necessities. Hence, even if they could trust government to supply
them with rations, they had no hope of survival there. Therefore, they sort of
immediately revolted against this draconian order by starting to walk to their
rural ‘homes’ where, based on nostalgia of long-gone days, they hoped to at
least remain alive somehow, though half-hungry, with their loved ones. However,
the Capitalist state immediately came down upon them with all its brute might as
the capitalist class wants them to remain in cities for the time when the
wheels of industry start turning again. They will rather have them starve so
that the wages can be further driven down. But many of them could not be
repressed and lakhs of them can still be seen walking, cycling, taking short
distance lift packed like sardines in covered trucks/containers in this summer
heat, for hundreds and thousands of kilometres throughout the country to reach
their native villages.
Foremost effect of
the lockdown on workers is the massive spike in unemployment which has already reached
26% according the latest data published by Centre for Monitoring Indian Economy
(CMIE) out of only the 36% working age population participating in the labour
force. Hence effectively only 27% of the working age population is now engaged
in paid employment. By this we can visualize the unprecedented huge size of
unemployed labour army created by already going on economic crisis further
accentuated by the current lockdown. Even IMF has forecasted that it will
potentially push 40 crore more Indian people below the barely hunger level
poverty line, i.e., pauperize them by making them permanently unemployed or
compelling them to work on meagre wages much below the value of their labour
power. Taking advantage of this bourgeois state is already amended the labour
laws and provided the working day to be extended from 8 hours to 12. Moreover,
central government has instructed that workers should not be allowed to travel
back to their villages but be transported within the same state wherever there
is work, i.e., some capitalists require them. This is equivalent to imposing
forced labour in labour camps.
Impact on
Capitalist Economy & Finance
In a situation
when capitalist economy was already suffering from shrinking aggregate demand
and industry was working on low installed capacity utilisation, the lockdown on
the one hand has actually made quite a big part of demand to vanish overnight as
people hunkering down in their homes lower their consumption, fearful of both
the disease and their precarious finances, on the other hand it has brought the
wheels of industry to a grinding halt reducing demand for commodities used as
constant capital. This implies, one, sharp lowering of the amount of total
surplus value being extracted by the capitalist class since no surplus value
can be extracted without employing the workers whose labour is the sole source
of value addition. Second, circulation period of capital becomes longer and
conversion of surplus already embedded in the commodities into money capital
will be delayed, thus requiring more working capital and reducing profitability
as less cycles can be completed with same amount of capital. Third, since the
fixed capital investment is done with loan capital, the amount of interest due
to be paid on that continues to accumulate despite no surplus being generated
or realised during lockdown. Hence many more industrial capitalists will find
themselves unable to repay interest to banks. Though Reserve Bank has asked
banks to allow moratorium on repayments for 3 months, instead of reducing
interest dues, it will rather increase them as the compounding effect comes
into play. Therefore, the repayments will rather become more onerous.
Government
Measures
Government, RBI
and industry all know this. Hence, to postpone the immediate disaster and find
some way out in the meantime, RBI has allowed banks to not treat overdue loans
as overdue, i.e., declare them Non Performing Assets (NPA) for 3 months in
addition to the existing window of 3 months and the government has now brought
out an ordinance to suspend the working of its own much touted ‘reform’ of bankruptcy
law for 6 months. This means that the bankrupt businesses will not be declared
bankrupt and loans will continue to be recognised as good even if there is no
repayment for next 6 months. However, this cannot alter the reality, only kick
the can down the road.
To lower the
interest burden on the industry, RBI has also made major reduction in interest
rates both in the Repo Rate to 4.40% for banks short of money borrowing from
RBI and in the Reverse Repo Rate to 3.75% for banks depositing excess money
with RBI. The purpose of Repo Rate reduction is to signal banks to reduce their
lending rate and by reducing reverse repo rate to force banks to lend more as
they will get much reduced return by parking money with RBI. However, despite
both measures neither the lending rate has gone down much nor the banks have
started lending, though banks have reduced their deposit interest rates heavily.
Statistics released by RBI show that the banks are parking greater than 7 lakh
crores of rupees with RBI through reverse repo daily at the low rate of 3.75%
instead of lending to industry at much higher rates. At this moment return in
the form of interest has become less important for banks than the security of principal
since banks do not know which companies will survive the crisis and which will
go down. Same is the case with industry
itself as much of the trade is usually done on inter-corporate credit but at
this juncture no capitalist is ready to extend credit to other capitalists as
there is no trust on anyone’s creditworthiness. Moreover, large corporates are
saving their own costs by delaying payments to their Micro Small Medium (MSME)
vendors putting them in even more precarious position.
Hence, most
bourgeois experts are suggesting that government should take over the existing
bad loans of banks and to provide some kind of future guarantee to banks if
their loans go bad. That means transferring capitalists’ private losses to the
public finances which will be then balanced through further ‘austerity’ on
public services and extortion through higher indirect taxes and levies, fees,
fares, etc from public. That means further dose of neo-liberalism of most
pernicious sort.
So, what is the
result? First, this will accelerate the monopolisation as smaller industrial
and merchant capital will face greater difficulties than their larger
competitors and are more at risk of going down. According to Credit Information
company TransUnion Cibil, risk of default is highest for these small
industries. Second, savers who loan money to industrial capitalists through
intermediation of banks will have reduced interest incomes as profitability
goes down and more loans are at risk. Many of the middle-class people securing
their future through savings route will find themselves insecure as the
capitalist class reduces their share in the total surplus value extracted.
Third, many financial institutions and bank will find it difficult to survive
as credit risk increases, thereby putting savers’ money at risk. Already one
big Mutual Fund Franklin Templeton has wound down 6 of its schemes and stopped
withdrawals of even a single rupee out of the total assets of Rs.28000 crores.
More MFs/Banks/NBFCs/Insurance Companies will be in crisis in coming days as
borrowers both in industry as well as individuals, because of job and salary
cuts, default in loan repayments. Moreover, with layoffs in jobs and cuts in
salaries, many of the middle-class employees will find themselves unable to
maintain their status and might lose their assets built with bank loans as
paying EMIs will be difficult. Besides, these assets will lose their existing
inflated market prices producing a loss of wealth effect. Hence, risk of their proletarianization
will increase.
Centre-State
Relations & Finances
It is becoming
well evident that both centre and state government finances are in dire straits
and fiscal deficit is quite high because of economic crisis and doles to the
capitalists through lower direct taxes and other concessions. They are finding
it tough to even pay salaries to their staff and many partial salary deferments
are being announced. The states are in serious difficulties as they have handed
over much of their taxation rights to Centre through GST and now find their own
hands tied. With regards to the devolution of taxes in the divisible pool,
Centre has increasingly resorted to collect higher proportion through
surcharges and cesses which are not classified as taxes and are not included in
the divisible pool. Therefore, the amount of money devolving to the states by
right has consistently gone down. Centre can distribute rest of the funds at
its discretion based on political choices and conditions attached. On the other
hand, most of the responsibility of dealing with Covid-19 and related high expenditure
lies on the states. There are reports that Centre has even forced many
industrialists to contribute to PM-Cares fund and not to the respective state
CM’s Relief Fund. Sensing the financial difficulty of the states even the banks
are lending to them at high interest rates of 7-8% for 10 years though same
banks have liquid money available to them at 4.40% from RBI through Repo. Hence,
states are becoming more and more dependent and beholden to centre for funds,
thus constraining their capacity for political dissent and opposition to
central government policies, thus making India more and more of a centralised
state, leaving it federal only in name.
Thus, the Covid-19
pandemic will further intensify the capitalist crisis, intensify cutthroat
competition for survival among the capitalists, accelerate monopolisation in
the economy, increase proletarianisation of petty bourgeois and elite working
class, push more working-class people into unemployment and abject poverty and sharpen
class contradictions. Besides, it will also exacerbate the political
contradictions within the capitalist class especially the region to region and
centre-state contradictions on account of the financial and economic effect of
the uneven regional development under capitalism.
Published in The Truth, May 2020
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