I believe the neoliberal regime is also reaching a dead end: Prabhat Patnaik

The economist talks economic speaks about why India hasn't changed for the better after 1991


Pankaj Srivastava | July 21, 2016

#25 years of Economic Reforms   #Economic Reforms   #Prabhat Patnaik  

The bearded and affable Prabhat Patnaik, a Marxist economist, taught at Jawaharlal Nehru University from 1974 until his retirement in 2010. A Rhodes scholar, he has authored several books including Time, Inflation and Growth as well as Economics and Egalitarianism. He spoke to Pankaj Srivastava about why India hasn’t changed for the better after 1991.

Do you think the economic reforms resulted from conviction, or a changing economic paradigm, or were forced by the donor agencies? Were there alternatives to the path chosen?

There are two separate issues here. The first issue is when there is a particular economic regime change, it is based on certain correlation of class forces. I think the previous dirigiste [originally a French word which means state-led] regime had more or less run into a dead end. The contradictions of the dirigiste regime have been much studied. It was a regime basically dependent upon continuous expansion of public expenditure and investment, but on the other hand this, in turn, required raising resources and the state had run into a fiscal crisis because its capacity to raise resources was constrained by the fact that substantial proportion of private wealth holders were not willing to pay adequate taxes. So, in a sense the dynamic of that regime had run its course and obviously therefore many people were disillusioned, because if the state runs into fiscal crisis, then to continue with growth may result [in] deficit financing, more indirect taxation and so on, all of which then give rise to inflationary situation. To control inflation you may have to attack the peasantry which the state did in the mid-70s and if so, then you alienate them. If you have inflation then you alienate the working class and agricultural labourers. You will also alienate the middle class which is very powerful in India – in the sense of being very vocal and articulate.

The second thing that was happening is that internationally there was the emergence of the finance capital. Pressure for the globalisation of capital flows at the same time when the regime in India and in many third world countries opposed such capital flows, [it] was based on a state playing a leading role.

I mean, capital is available from outside, why don’t we take it and have high rates of growth! We can have investment based on that, so open our doors! Once you open the doors, you cannot distinguish between financial flows, direct investment flows. Finance has a speculative role, it can go out tomorrow. Therefore once finance comes in, then the state has to act in ways that retain the confidence of the financiers. Therefore the state policy has to change. The state cannot just do anything it likes. Even if you have a revolutionary government that comes to power, as long as it continues to be open to global financial flows, it would do exactly the same, as any other bourgeois government. So that being the case, you actually had a change in the nature of the state, to develop neoliberal policies.

Was there an alternative? We cannot discuss the alternative only in terms of what is good or what is logically possible. We have to again think of it in terms of the correlation of class forces. I think, in a sense, people’s disillusionment with globalisation is now going to bring about a change in the correlation of class forces, where you can find an alternative.

Let us say the alternative, which needs to be put into practice day after tomorrow, not in 1991, is one which would entail land reforms, substantial growth in agriculture so that the home market develops, industrialisation based on that and so on. These require bold steps that would also generate an opposition. But when you are thinking in terms of getting in capital from the international market and developments, it is not pinching anyone. Later on, they may suffer when the debt has been paid. Which is why globalisation at that moment generated the euphoria that we will have a high growth rate, which was an illusion. Therefore generating that kind of a correlation of class forces would have been difficult. The working class came out in opposition to globalisation quite a lot, but peasantry took time to understand its implications. But now there is a much stronger opposition growing.

A key refrain about reforms has been that it has increased the gap between the haves and have-nots. Yet, the ‘middle class’ has grown in number, and the number of the poor has gone down. Then, how do we explain this lingering sense that economic choices for the average citizens have reduced due to the reforms?

This idea that the number of the poor has come down is really a myth that is propagated by the successive governments and by the planning commission. In India, you find that the definition of poverty is with respect to a benchmark calorie intake, which is 2,400 calories per person per day for rural India and 2,100 calories per person a day in urban areas. You simply look at the number below that calorie intake. You find that the proportion of the rural population which is below that calorie norm was about 57.5 percent in 1993-94, according to National Sample Survey findings. In 2011-12 that has gone up to 68 percent. Now if you look at the proportion in urban areas it was about 56 percent in 1993-94, it is now 65 percent. In fact, the FAO [The Food and Agriculture Organisation] itself has said that India today has an extent of hunger which is greater than sub-Saharan Africa and is also greater than the least developed countries as defined by the UN.

When you say this, many people say “Oh, you know, people are voluntarily choosing to eat less.” But all over the world, when real income increases, consumption per head of food grain increases as real income increase. People don’t eat directly more wheat, they eat more processed food, they eat more animal products, into which food grain go in as feed grain. So, directly and indirectly consumption increases.
Strictly speaking, we should define poverty with respect to a calorie norm, but this is something which the planning commission [now Niti Aayog] does not accept. This method had been used in 1973-74 but after that, they didn’t use it. But hunger is a symptom of poverty and there is no doubt at all that in India the extent of hunger has increased in this period of liberalisation. That has been the case. Any suggestion that poverty has come down is completely wrong.

And as far as the middle class is concerned, yes there was a period when the middle class was doing well, but I think  now in the context of the capitalist crisis, the middle class is not only beginning to find difficulties but these difficulties are going to increase. In the US, there are heavier taxes on those companies that outsource some of their activities to countries like India. If the US goes protectionist, then even the middle class [would] lose opportunities. When the crisis hits, it also affects middle class employment opportunity.

Initially, the reforms had little political acceptability even within the ruling party. By the end of the first decade, there was a consensus about its essential benefits among all parties, barring the Left. How do we explain that in terms of electoral democracy?

You see, there are two issues here. One, as you said rightly, the increase in the employment opportunity for the middle class. The middle class in India played a very important role. It’s very vocal, very articulate, well represented in media, and consequently it plays a role in projecting a certain situation.

Due to this increase in employment of middle class it appears as if the society is doing very well, but it is a misleading impression. The Brexit vote pointed out precisely this. In England, the working class has done very badly in the last several years but the middle class has done well because of ‘financialisation’.  They related to the City of London, to the financial sector.

The second thing about why most political parties, other than the Left, are in favour is because the costs of the transition from a neoliberal regime are very high. Suppose tomorrow a political party says that we are opposed to liberalisation. The moment the opinion polls say that this party will do well, there will be a capital flight from the country. When there is a capital flight your exchange rate will fall. When exchange rate falls, inflation will rise because you import expensive goods like oil. Opponents will say, “You see, even before these fellows have come to power, people are suffering. Imagine what would happen when they actually come to power.” So the costs of transition are so great that no political party, other than the Left, because the Left derives its position from some theoretical understanding, has the courage to really say or do anything against the economic liberalisation. That is why, no matter who is in the government, the economic policies are the same.

This is why getting caught in this globalisation of finance is such a dangerous thing  because it is very difficult to get out of it.

The labour ‘reforms’, that is, relaxation of laws in favour of flexible hiring and firing, is said to be one of the pending items. How do you see the labour sector vis-à-vis the reforms during these 25 years?

This is one of the most amazing lies which has been perpetrated. It is said that India’s industrialisation is held up because we don’t have labour market flexibility. But employers have found  ways around it. Casual employment has increased. At the moment whatever residual labour laws remain, [they] affect only 4 percent of India’s total workforce. So the idea that this is holding back the growth of the entire economy is completely false. This is being propagated in order to bring about labour market flexibility which means complete freedom on the part of the employers to hire and fire, and that is being done in order to smash the trade union movement. Because if you can hire and fire anybody at a moment’s notice, the trade union movement becomes impossible. So really you are going back on the rights that the working class has earned over a century ago by way of developing trade unions. The reason why growth is not happening is because of the world capitalist crisis, not because of our labour policy.

The reform years have also been the years when the Leftist parties came to be marginalised. That should be ironical, given that the Left could have played a key role in giving voice to the newly disempowered. Your views?

I think that is a very important point. To my mind the reason lies in the fact that in a society like ours, where there are substantial peasantry and labourers, agriculture still accounts for nearly 50 percent of the total workforce. Farmer suicide shows that there is acute agrarian distress. I think it really requires organisational efforts which are quite substantial. The second thing is that the areas in which the Left was in power, they were obviously not in charge of making any laws related to agriculture price and procurement, as those are the centre’s subjects. On the other hand, they were under pressure from the middle class to increase employment opportunities.

I think industrialisation in West Bengal was really a product of a pressure which the Left felt from middle-class voters, that other states are doing very well in creating job opportunities, what are you doing? And consequently the intrinsic difficulties of organising vast masses of India’s working population, vis-à-vis the fact that the pressure of the middle class was actually quite strong even on the Left, in states where it rules, to invite capital to set up plants even at the expense of peasant alienation. I think this is responsible to an extent for why the Left has not been able to make the mark.

But there is a second point also. Precisely because of what you said earlier, all political formations, whether they like it or not, they are paying lip service to neoliberal policies. The Left is the only formation that is still critical of it. And therefore, this is an isolation of the Left. But all this would change, and I believe all this is changing. The moment the capitalist crisis begins to hurt the middle class, and the moment globalisation itself seizes to be an option, just as the dirigiste Nehruvian regime had reached a dead end, I believe the neoliberal regime is also reaching a dead end. When that happens, I think there is going to be more enormous growth of resistance and of course the Left would be leading and therefore there would be a revival of the Left.

In recent years, some organisations, journals and spokespersons of neoliberalism have articulated some second thoughts on this project. Would you elaborate on the debate?

See, the IMF has now come out with a document saying ‘neoliberalism overblown’, that means it benefits but [it is] exaggerated.
IMF is not going to change its practices but there is a realisation that neoliberalisation is beginning to fall into disfavour in large parts of the world. And that is because of the crisis capitalism has entered into is far more serious than anything we have seen since the great depression. It is serious because of the fact that from the great depression, the capitalist countries came out initially because of war, and in the post-war period, because of state intervention and demand management. But now the state cannot intervene because it is tied up by fiscal responsibility, which finance capital insists on. Therefore, under the hegemony of finance capital, this crisis is going to widen.

There is another very important reason. A lot of productive activities have shifted from advanced countries to countries like India and China. In the advanced countries, therefore, the workers are competing against these workers in third world countries. Their wages have not increased. In fact, figures show that the average  wage of an American male worker has not increased, but has even  marginally declined between 1968 and now.

This is a very serious thing. In third world countries like India, real wages are not rising, because peasantry is getting disposed of, labour is enormous, employment is not growing. So all over the world, you find a situation, where real wages are not rising and labour productivity is rising. Therefore the surplus, which is output minus wage bills, is rising everywhere. When surplus rises and demand does not rise as quickly as output rises, the shift from wages to surplus also creates a demand problem for world capitalism. Therefore, this crisis is very serious.

The only way capitalism can come out of it is to have an asset price bubble like situation. But even if such a bubble occurs, it will collapse very soon. So we are now into a long period of crisis and capitalism has no way of coming out of it as yet. There is no plan, no vision that actually would suggest that capitalism has a way of coping with its crisis, and consequently I think this idea of neoliberal capitalism associated with globalisation and so on has now somewhere reached a dead end.

A very conservative American economist, Larry Summers, has now produced a ‘stagnation thesis’ which the Left has been producing for years. So, even right-wing economists are now talking about capitalism running into stagnation. In this context, I think this awareness is spreading everywhere except in India where some ‘experts’ are saying that everything is all right.


(The interview appears in the July 16-31, 2016 issue)



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