Theory and Reality


By all accounts, on an average, the rate of growth of real national income since 1991-92 has been at least as much as that of the 1980s. The neo-liberal regime of accumulation seems to have fared relatively well on the criterion of growth. But why has growth not trickled down enough to also benefit the poor? Aggregate demand may have relatively suffered as far as the component of workers and government employees’ (the latter excludes government officials) consumption is concerned. However, capitalists’, managers’ and government officials’ consumption demand may have got a boost from the lowering of the rate of direct taxation of what may indeed be essentially profit income that accrues to them. As far as the government officials go, the 5th Pay Commission award seeks to increase the share of the officials’ control over the tax revenue, and effectively downsize the government employees’ share. A downward pressure on the money wage comes from a temporary reduction in the degree of monopoly following the immediate opening up of the Indian economy to the transnational corporations and the dismantling of the industrial licensing system , a de facto decline in the power of the organized workers, a tendency of the exchange rate to be subject to the interests of international portfolio capital, and high interest rates maintained through monetarist monetary policy. At the same time, an upward tendency of the exchange rate, a change in the regime of accumulation that encourages flexible labour markets, and being forced to modernize management and technology due to competitive treats from the TNCs, is leading to an increase in labour productivity. It seems that unit labour cost is under a downward pressure as a result. In other words, private investment-led growth is being relied upon to boost aggregate demand. Government investment-led growth is of course anathema to the neo-liberal regime of accumulation. Can we expect the growth rate of net exports to pick up? Prospects for this do not seem very bright due to the tendency of the exchange rate to appreciate in a regime where the central bank is gaining autonomy and representing more and more the interests of finance capital.  

Let us make “pricing to market” assumptions for final goods, but assume that raw materials are priced on the basis of a marginal cost rule. “Pricing to market” means that the foreign exchange price of the import is such that, given the exchange rate and the import tariff, the price in the importing country’s currency is kept stable. The relative price that then assumes importance is the nominal wage rate relative to the domestic currency price of the composite imported raw material. In a flexible labour market, an appreciation of the exchange rate, ceteris paribus, leads to a tendency on the part of capital to substitute labour abroad in favour of labour in the domestic economy, in the form of an increase in the imported raw material coefficient. As far as the Indian reality is concerned, if and when capital account convertibility is allowed, one may then witness a rising tendency in urban poverty too. A caveat to this is however fair to mention. The closer the imported raw material is to the final stage of being converted into the final output, the greater is the chance that its pricing will be determined by mark up pricing rules rather than by marginal-cost based pricing rules. Hence, one should not exaggerate any tendency towards “de-industrialization” as a consequence of import liberalization and exchange rate appreciation following financial openness. We expect a tendency toward de-”proto-industrialization” in rural India.  Indian Keynesian and Kaleckian macroeconomists must come to accept that the proportionality between price and the money wage rate is possible only when all prime costs are

ultimately reducible to labour in the national economy. And, even in a relatively closed economy, the assumed proportionality of price and the money wage rate breaks down when either the labour movement overpowers the capitalist offensive, or vice versa.  In the underdeveloped open economy with de facto capital account convertibility, the proportionality between price and the wage rate is unlikely to hold, especially if the regime of accumulation has been transformed to one that promotes private investment-led growth, where labour markets are flexible and the trade union movement has been debilitated. The bulk of unorganized workers in India, faced with an increase in the relative price of food, without any adjustment in terms of a cost-of-living index, face a cruel redistribution from wages to profit. Keynesian-Kaleckian theory may indeed be on the right track in postulating that a decrease in the real wage does not increase the derived demand for labour. A lower real wage does lead to a higher profitability of investment, but also lowers the level of effective demand. This latter effect may well nigh override the positive effect of a lower real wage on the profitability of investment. Hence, the neoclassical expectation of an increase in employment with a lowering of the real wage must be highly suspect.

Ashok Mitra brilliantly analyzed the question of the politics of food-grain prices in the 1970s. This analysis needs to be imaginatively updated to apply it in today’s context. In the context of the present as history, in today’s world industrial capital also has to accommodate finance capital, besides the agrarian oligarchy, and the latter also has to accommodate finance capital, besides industrial capital.  Both, namely, industrial capital and agrarian oligarchy, are thus forced on the offensive vis-a-vis the industrial workers and the small peasants/agricultural labourers, respectively. A deceleration in the growth of real wages in the agrarian and industrial sectors of the economy is therefore to be expected, and this, not only via an increase in the absolute (and relative price) of food-grains. One can expect greater resistance by capital to any struggle by the workers to increase the money wage rate.   And, with a continuation of the trend towards labour-saving technological change, one may witness at least a deceleration of the rate of reduction of absolute poverty.

We think that with the increasing globalization of the financial sector in India, the existing institutional credit network under the Regional Rural Banks and the apex bank for agriculture and rural development (the NABARD) is, in a relative sense, in decline. This presents greater opportunity for an existing large but unknown number of indigenous bankers and moneylenders, particularly in the rural areas, once again thriving in the provision of quasi-banking services. The large number of rural and semi-urban branches of the public sector commercial banks is, in a relative sense, in decline, and indigenous bankers and moneylenders are gaining. The vast savings of the rural rich are however continuing to be increasingly intermediated by the formal banking institutions, and channeled into urban India, with a part of that pie going into speculation in financial instruments. The rural moneylenders and traders are operating largely at the lower end of the market, their clients being the poor peasants in ‘forced commerce’ (in Amit Bhaduri’s and the late Krishna Bharadwa’s) sense of the term. Thus, with financial liberalization, we are postulating an increasing segmentation of credit and intermediation services markets in rural India, with the formal institutions at the upper end of the market and the traditional moneylenders and traders at the lower end. The question that arises is what may be happening to poor peasants?