Plummeting GDP and Booming Stocks
In the last couple of issues Liberation carried pieces on the highly worrisome pandenomic situation in India and the Modi regime’s dogged refusal to adopt a proper stimulus package as advised by not only the Left and heterodox economists but also the acknowledged experts in bourgeois economics and institutions like the World Bank. In this delayed concluding part of the article initiated in October last, we shall try and elaborate on the essential reason behind this refusal, the alternative strategy being followed and its implications for the economy and the people of India.
Simply put, the government is afraid to put money in people's hands because that will involve more deficit financing, which is an inviolable taboo in a neoliberal economy under the hegemony of global finance.
The Neoliberal No-No
And why is it a taboo? Because it leads to inflation, which erodes the value of investment returns (dividend, interest). For example, if a five crore stock earns six per cent return and inflation runs at seven per cent, the investor will earn a negative return of one per cent and thus the value of even his capital will diminish. As Warren Buffet put it, inflation is the most “devastating tax” with a “fantastic ability to simply consume capital”. The financiers therefore hate inflation and deficit financing. So governments fear that in a high inflation scenario global agencies will lower credit ratings of the country concerned and investors (not only from foreign countries, but domestic ones too) will look for greener pastures with a lower inflation rate. The outflow of foreign and even part of indigenous capital, with attendant devaluation of the home currency, would lead to a crash in the stock market and may be a run on the banks. Governments in all countries are mortally scared of such a scenario. So they believe they must religiously obey the perennial edict on so-called financial prudence issued by the Buffets and the FIIs, FPIs and DIIs
In fact this is precisely what is happening in our country. The self-proclaimed nationalists in power - - the protagonists of Atmanirbhar Bharat - - are shamelessly sacrificing the economic interests and political sovereignty of the nation to placate the national and international moneybags.
But how did finance capital come to occupy such a dominant position in the international hierarchy or network of capital?
Genesis of Corporate Finance Capital
Credit or finance appeared in course of evolution of capitalism to perform the necessary function of greasing the wheels of industry and commerce. In course of time, however, it gradually rose to a position a notch higher than the latter - - above the real economy, which produces goods and services - - disconnecting itself more and more from it. (It is tempting to draw a parallel with the evolution of the state, which arose out of society but placed itself above society, alienating more and more from it; but to do so will not be scientifically flawless.) The genesis of finance capital involved a protracted and complicated process, but we can cut the long story short with five bullet points.
1. Already in the second half of nineteenth century, Marx took note of “a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance and stock speculation”. (Capital, Vol. I) This, he observed, was closely linked with enhanced role of credit both as accelerator of growth and, when stretched beyond a limit, as harbinger of crisis.
2. The role of credit in the capitalist system as a whole went on expanding and reached a qualitatively new stage with the advent of modern imperialism, a parasitic and decaying system marked by new features like all-round monopolisation, export of capital outweighing export of commodities, the rise of the financial oligarchy etc. Money capital now morphed into finance capital and attained a much more influential position. As Lenin pointed out more than a hundred years ago in Imperialism, the Highest Stage of Capitalism:
“Imperialism, or the domination of finance capital, is that highest stage of capitalism in which the separation [“of money capital from industrial or productive capital”] reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially ‘powerful’ states stand out among all the rest.” Thus, the “twentieth-century marks the turning point from the old capitalism to the new, from the domination of capital in general to the domination of finance capital.”
3. Lenin also showed that “Modern banks concentrated the social power of money in their hands, and began to operate as “a single collective capitalist”, and so “subordinate to their will not only all commercial and industrial operations but even whole governments.” Very important in this context was the three-way “personal link-up” between industry, banks and the government.
Elaborating on the new stage, Lenin wrote:
“The development of capitalism has arrived at a stage when, although commodity production still ‘reigns’ and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the ‘geniuses’ of financial manipulation. At the base of these manipulations and swindles lies socialised production, but the immense progress of mankind, which achieved this socialisation, goes to benefit... the speculators.”
4. The separation of money capital from productive capital and the supremacy of the former continued to grow. With the onset of liberalisation, globalisation, privatisation in the closing decades of the 20th century, finance capital arrogated to itself the freedom to move in and out of enterprises, economic sectors and countries. In the process there arose, in the words of Paul Sweezy, “a relatively independent financial superstructure …sitting on top of the world economy and most of its national units”. That is to say, there is now an “inverted relation between the financial and the real”, where “the financial expansion feeds not on a healthy real economy but on a stagnant one” (The Triumph Of Financial Capital, Monthly Review, June 1994; emphasis added).
5. At the turn of the 21st century yet another method of making money out of money bypassing the hassles of production was devised with the help of information technology and the rapid spread of internet connectivity. A completely new breed of firms like Amazon, Alibba, Facebook and Google gave rise to what has been called platform capitalism. These online or digital platforms do not own productive facilities or inventories (Uber for example owns no vehicles; Facebook creates no content; Alibaba and Amazon have no inventories) but provide the vital “interface” between sellers and buyers/users, in the process stealing, assembling, using and misusing huge quantities of data.
In the Aftermath of the Great Crisis
In its apparently unstoppable ascendance and growing dominance, monopoly finance capital faced a very tough challenge in the crisis of 2007-08 and the deep recession that followed. In the US, George W. Bush (and others of his ilk in other countries ) bailed out private financial institutions including banks with taxpayer money and imposed ‘austerity’ (huge cuts in government spending) on the public. But the challenge was not just economic, it was very much political. A groundswell of anger against the greedy corporations and the US Government's pro-super-rich policies found expression in the occupy movement and other protests launched under the slogans '99% versus 1%' and ‘Wall Street versus Main Street’. While spreading out to the wide world, in its epicentre the political impact of the movement also helped a black Democrat win two consecutive victories in Presidential elections. But the Obama Administration did precious little to curb the power and influence of big money. The fattest moneybags retained their strength. They successfully repulsed the popular movement for equality and justice by orchestrating a right wing populist counter-campaign complete with racist, majoritarian, misogynist, xenophobic venom, which culminated in the election of Donald Trump.
Thus began a new phase of more aggressive rightward shift in economic policy (tax cuts and other sops for the rich, austerity for the working people) and in political strategy/form of state (gradual shift from democracy to autocracy/authoritarianism/fascism) -- a universal trend with important national variations. The blatantly pro-billionaire, anti-people economic policies of the communal fascist government in our country is but a specific instance of this general trend.
So this is how Marx's "new financial aristocracy" and Lenin's "financial oligarchy" has today evolved into what we now call corporate- finance capital. We prefer this term because it is theoretically correct (it recognises the coexistence and interdependence-conflict dynamic that defines the relationship between the financial sector on the one hand and the industrial and trade sectors on the other) and politically explicit (it pointedly identifies and targets the class enemy of our era -- the giant corporations which immensely influence economic and political policies of nation states.
Myriad are the ways by which corporate finance capital manages to fatten itself even during the most difficult periods like the present one. And by far the most important avenue runs through the stock market.
How Bourses Breed Billionaires
Per a report published by the Swiss bank UBS in early October, the wealth of the world’s billionaires increased by 27.5 per cent between April and July this year, the period when the pandemic was at its peak. Their wealth by the end of July had touched a record high of $10.2 trillion. A UBS spokesperson added that when stock prices were falling in February-March, the billionaires, rather than offloading their stocks, bought up stocks from smaller owners who were busy panic-selling. So when stock prices increased after April, they got enormous capital gains.
It is easy to see that these gains arose essentially because the small stock-owners did not have the capacity to hold on to their stocks. Thus the increase in concentration of wealth during the pandemic resulted from a well-planned, secretive business move on the part of big players at the cost of small/retail investors. This is one of the many ways big capital uses every crisis -- economic, political, natural, medical, environmental, whatever -- to bolster its monopoly position and accelerate concentration of capital.
The same thing we are witnessing in our country, as a brief survey of the Forbes list of 100 richest Indians, released in early October, would show. The list reveals that more than half of them saw their collective net worth growing by 14% over the past one year to reach US$517.5 billion . The list also features nine newcomers who acquired much of their fortunes during the severe economic downturn. For most of the hundred tycoons, the main source of growing net worth (total assets minus liabilities) could hardly be profits made in normal business operations, i.e., production and sale of goods and services, because economic activities started slowing down well before the Pandemic and then most of India went into a severe shutdown. In fact many of the gainers incurred substantial losses in their business activities in this period. Clearly, the huge appreciation in wealth came from a surge in stock prices -- a stock market boom -- propelled by factors not related to the gainer’s business performance and the country’s economic fundamentals. While some amassed wealth despite the pandemic and lockdown, others prospered thanks to these conditions.
For the first category, the rising fortunes of Mukesh Ambani (henceforth Ambani) -- India’s most successful crony capitalist who has enjoyed equal favours from both UPA and NDA regimes and retained the top position for thirteen years in a row -- serves as a good illustration. He alone grabbed more than half of the gains made by fifty-plus dollar billionaires together, adding as much as $37.3 billion, raising his fortune by 73% to $88.7 billion. Just a few months ago, however, his financial conditions were not exactly enviable. In April global crude oil prices fell to their lowest since 1999 and hit Reliance Petrochemicals very hard. The RIL chairman decided to forgo his annual salary of ₹15 crore even as management staff with with annual salary in excess of ₹15 lakh accepted a 10% reduction in fixed pay. RIL even requested its nearly 900 dealer-operated retail outlets for a 10% reduction in monthly rent for 10 months. But this loss was insignificant compared to the blow on Dalal Street. A massive bear run, which was aided by FIIs offloading more than $15 billion stock in the month of March alone plus a 5.2 per cent drop in the value of the rupee compared with the US Dollar, sent Reliance stock price down by 25%. As a result, Ambani’s net worth sank 28%.
The devastation spared almost no one in India and abroad . Gautam Adani, a distant second on the list of richest Indians, lost $6 billion or 37% of his wealth and so did other biggies.
But the bear phase did not last long. The Government of India and the RBI promptly handed out generous doses of liquidity so as to prevent a free fall of financial asset prices. Shares of Reliance Industries soared again when, during the lockdown, Ambani raised more than $20 billion from a string of glamorous foreign entities (as noted at the beginning of Part I) for Jio Platforms and more than $5 billion for Reliance Retail. Similarly, Gautam Adani recouped his losses and augmented his net worth 61% to $25.2 billion. Two steps up the ladder, two steps down and two steps up again - - for the rich and well connected, this indeed is the way of life.
Among the other category of gainers -- those who profited directly from the global health and economic crisis -- the foremost were some of the pharmaceutical companies. The fortune of vaccine billionaire Cyrus Poonawalla, owner of Serum Institute of India was up 26% to $11.5 billion. Kiran Mazumdar-Shaw, founder and MD of vaccine-maker Biocon, saw her wealth nearly doubling to $4.6 billion. In both cases, share prices rose in anticipation of the huge profits these companies were expected to earn in future by selling COVID -19 vaccines.
The rich list includes several big players whose exclusive or main source of riches is the stock market, such as ‘big bull’ Rakesh Jhunjhunwala. Moreover, with thousands of new small investors thronging the stock market in a situation of low interest rates on fixed deposits, it is but natural that brokerage farms also would be doing brisk business. Thus it is that Kamath brothers Nithin and Nikhil, the founders of Zerodha, India's biggest stock brokerage farm and of True Beacon (which is focused only on ultra-high net worth investors) have entered the Forbes list this year. Incidentally, their father Sanjeev Bikhchandani, co-founder of Info Edge (India), which owns popular job and property websites (during the staggered lockdowns online purchase and sale of property increased many-fold) is also among the nine newcomers on the list. Nikhil, aged 34, is the youngest among the top 100 billionaires.
In sum, this is how stock markets in India, as in other countries, generate personal wealth in billions of rupees/dollars without contributing a paisa or a cent to the national product, i.e., the GDP of the country concerned. At work here is the process of big fish eating small fish, which in modern times takes the shape of concentration of capital.
An Interesting Conversation
While doing some research on recent trends in Indian stock exchanges, the present writer came across a blog post which correctly notes that equipped with a cheap mobile phone with free 4G data and helped by a discount broker, “youngsters in rural India and suburban India were entering stock market. Even the more sophisticated lot started joining them soon as the interest rates in fixed income instruments started falling. Then came COVID -19. A whole nation was forced to sit idle in home for months. Millions joined in stock investment.” The author of the post welcomes this as a healthy development that breaks the grip of “autoctatic” players and “democratises” the stock market, making it a level playing field for small investors.
On this I commented that the oligopoly of foreign and domestic institutional investors have the organised strength to come together and force a bear rally on the markets at a time of their choosing and pick up best shares at low prices, thereby pushing up the prices again. The whole process would lead to huge losses, if not financial ruin, of the larger section of retail investors and corresponding gains for the Jhunjhunwalas and Ambanis. So, as always, matsanaya (big fish eating small fish) still prevails on the bourses - - only on a much larger scale than ever before.
The response I got really helped me understand how big predators actually hunt and feed on smaller souls and gain weight:
“Thanks for the comment. I agree. I have a strong suspicion that our DIIs have some kind of cartel which is not known to the outside world. Why do I say so? 13th March trade in Indian bourses were too correlated to be ignored. Market hits a lower circuit which leads to expectation that once market opens, there would be further downslide. However, strangely, during the pre-market hours after market opening, almost all good stocks were picked up at whatever price was there on offer leading the index end up about 5% higher! The kind of money required for this is not in command of any single entity or even a few entities. It requires a cartel of much larger size. And I do not believe that all of a sudden all big guys started dreaming about Indian market within that circuit break period who were selling vigorously half an hour back. So, there is a cartel which can try to bring down the market as you apprehend.”
The confessions of the bullish market insider in India and the observations of a Swiss bank spokesperson point to the same thing. Giant speculators, euphemistically called investors, no longer just bet on but also, to a large extent, calibrate the price movements and thus feed on smaller players. At times the mechanism does fail. But then they always have the state itself at their beck and call as the saviour of first resort, which helps them replenish -- and expand -- their coffers.
The State as Custodian of Market Buoyancy and the Vicious Cycle
This role of the Indian state has been particularly conspicuous throughout the Modi regime. A few months before Corona struck, the government compelled RBI to release rupees 1.76 lakh crore, the better part of which was then handed over to big corporates as tax cuts and other incentives. This was complemented by RBI announcing successive rate cuts, which made cheap credit available for investment in the stock market. Both measures ensured relative stability and buoyancy in the bourses. During Coronatimes too, the primary intent of all ‘packages’ and measures has been to preempt stock market bursts rather than boost consumption and effective demand.
No doubt that intent has been, one might say, over-fulfilled. Thanks to the fiscal and monetary stimulus provided by the government and the RBI respectively, there was a major spurt in institutional investment. And that helped the BSE Sensex, which fell from around 40K in late February to 26K in late March, regain the lost ground to reach nearly 40K in August. A major role in this grand resurgence was played by PSUs like LIC and SBI. They had to buy stocks and boost ‘market sentiment’ under government orders, in utter unconcern for the high risks they were exposed to. Since August, the market so far has defied the gravitational pull of the worst contraction in independent India and touched nearly 44 K as of 20 November
The revival has been spectacular indeed, but whose interest does it serve? Glittering prosperity of the select few grows in glaring contrast to the pathetic pauperisation of the working masses. Inequality of income and wealth, class polarization in other words, goes hand-in-hand with deliberately fanned up communal, caste and other frictions. While the latter jeopardize our democratic-secular-pluralist ethos, growing inequality generates a vicious cycle in the economy. Deprivation of the labouring billions dampens demand and thus decelerates the real, productive economy, causing further job losses and reduced incomes for the mass of people, which in turn leads to reduction in consumption and therefore production, even as the wealth of the nation continues to be usurped by the rich. So we are back to worse inequality.
We must break free from this vicious cycle. We must get rid of those under whose supervision it is moving on with increasing ferocity -- the corporate communal fascists in power -- and move on towards a radical democratic transformation of society. We must see to it that the ongoing and forthcoming struggles on the streets and on the parliamentary arena are consciously directed to this goal.