On November 8, 2016, Prime Minister Narendra Modi announced the demonetisation of ₹1,000 and ₹500 notes with immediate effect, stating that the move would serve as a major assault on black money, counterfeit currencies, and corruption. The days that followed the announcement saw public panic
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Why India must abandon the post-1991 economic ideology and forge its own path – like China
The war between capitalist and socialist ideologies finally ended with the collapse of the Soviet Union, according to Francis Fukuyama’s thesis of “the end of history”. However, the history of ideological conflicts has not ended. India’s trade and economic policies, which have been driven by the logics of post-1991 financial globalisation and neo-liberal capitalism, now need fundamental reforms.
The era of the borderless world for free flows of investments, finance, goods and services, has ended with four big shocks: the 2008 financial crisis, the freezing of global supply chains with Covid-19 pandemic from early 2020, US President Donald Trump’s trade wars with the rest of the world (2024, ongoing), and last month’s choking of global flows of hydro-carbon energy with the closure of the Straits of Hormuz by Iran and the US.
The financial crisis woke up economists to the need to regulate financial flows and find a “new normal” for the economy. The old normal has continued nevertheless because economists cannot agree whether lesser or more freedom for finance, investments, and trade is the right solution for economic recovery.
Covid-19 made clear that global supply chains, and any economies dependent on them, are not resilient. The effects of the financial crisis and Covid-19 on the most vulnerable citizens have also made clear why governments, whether they are democratically elected or not, are required to provide public services and social security equitably.
Economist Nicolai Kondratiev had explained in his book The Major Economic Cycles, published in 1925, that changes in the political economy happen in “long waves”. He pointed out that capitalist economies don’t just fluctuate in short business cycles of recessions and booms, but also in long waves lasting 40-60 years.
Within these longer waves are shorter waves of recessions and booms, within which are much shorter ripples – the “high frequency” indicators of the performance of a modern capitalist economy – the quarterly business results and daily stock market fluctuations that the business media tracks.
Sociologist Wolfgang Streeck explains in his book How Will Capitalism End? that capitalism will not end suddenly. He points out that, after the 2008 financial crisis, capitalism entered a prolonged decline – a drawn-out end rather than a dramatic breakdown. “For the decline of capitalism to continue, no revolutionary alternative is required, and no plan for a better society displacing capitalism,” wrote Streeck. “Contemporary capitalism is vanishing on its own, collapsing from internal contradictions, and not least as a result of having vanquished its enemies.”
Streeck points to some fundamental contradictions in contemporary neo-liberal capitalism. One is the view that citizens of societies are only consumers in an economy and that their aspirations to buy more is the principal energy for economic growth. It is assumed that consumers’ needs for adequate incomes will be fulfilled automatically by some invisible hand that drives economic growth.
Citizens’ needs for dignity within their societies are ignored. Or it is presumed that their needs for respect from others will be fully met when they earn and consume more, which they are becoming less able to with the global progress of technological, human-displacing, solutions for improving economic productivity.
Another contradiction lies in the private sector’s demand for governments to stay out of the economy to make more room for the private sector’s growth. To the extent that consolidation of public finances through spending cuts resulted in overall gaps in demands or citizens’ discontent, the financial industry was happy to step in with loans to households, provided credit markets were sufficiently deregulated.
This began in the 1980s and ultimately caused the financial crisis of 2008. From the 1990s, and even faster after 2008, inequalities in wealth between the top 1% and the rest of society have accelerated; as documented by economists like Thomas Piketty, and thinktanks like Oxfam and others. With the financialisation of economies, the wealth of the top 0.1%, which consists mostly of stock market wealth, has soared to stratospheric levels above the wealth of the rest.
With their enormous wealth, and the political power it gives them, the wealthiest people control the media and public opinion, and also influential think tanks and research programs. When economies falter, their solution is less regulation and more freedom for the private sector. They advocate less taxes on wealth to provide incentives for wealthy people to invest in the economy. This makes it impossible for governments to provide the social safety nets that become essential when “ease of doing business” trumps the “ease of living” of poorer citizens.
India’s economic strategy has been aligned with global forces since the 1990s. The frothy wave of techno-financial globalisation which rose in the 1990s has peaked. The deeper, ideological wave of boundaryless international trade and investments is also falling. There is no justification now for insisting that more international trade with more participation in global supply chains, where the work is done in India and the value is captured in other countries, is a viable strategy for growth of the Indian economy.
India’s economy can be, and it must be the engine of its own growth. India’s policymakers must take the tough route now, which they abandoned in the 1990s, to build depth in India’s own industrial base. India has the largest pool of employable persons in the world. They can be the world’s largest growth market for foreign and domestic investors, provided they are enabled to earn enough.
The Bharatiya Janata Party and Congress are bitter political rivals. Nevertheless, through 10 years of Congress-led United Progressive Alliance rule, form 2004-2014, and the next 10 years of BJP-led National Democratic Alliance rule, from 2014-2024, the ideology driving India’s economic policies remained unchanged. Greater volume of international trade, regardless of the composition of the trade; more foreign direct investment with less requirement than before for foreign investors to share their technology for progressively strengthening India’s own industrial base – which had been the policy before.
China was not cowed down by the US at the supposed end of ideological history in 1991. It stayed on its “socialist” course. It built China’s domestic industries. It kept the levers of economic control in the government’s hands: a government-controlled financial sector; a large public sector; industrial policies to build strategic industries like AI, processing of rare minerals; and the world’s largest renewable energy industry. Overall, China also retained its “socialist” orientation: “socialism with Chinese characteristics”, Deng Xiao Peng called it.
History has moved on. India’s policymakers and economists must move on too. Pragmatic political leaders are now trying to change the trajectory of India’s economic policies. Theoretical economists, on both sides of the political divide, are alarmed. They fear that India is retreating from globalisation and going backwards to socialism. They should recalibrate their economic theories with on the ground and global, social, political, and economic realities and move on with history themselves.
Arun Maira is the author of Reimagining India’s Economy: The Road to a More Equitable Society and a Former Member of the Planning Commission.
Source: Scroll
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