Finance liberalisation, path
dependence and the
prospects of an alternative:
India
A case of success?
India (along with China) considered one of the
economies in the developing world that is a “success
story” of globalisation.
Success defined by the high and sustained rates of
growth of aggregate and per capita national income;
rapid expansion of (services) exports; substantial
accumulation of foreign exchange reserves; and the
absence of major financial crises that have
characterised a number of other emerging markets.
Sources
Seen a consequences of a “prudent” yet extensive
programme of global economic integration and
domestic deregulation that involves substantial
financial liberalization, but includes capital controls
and limited convertibility of the currency for capital
account transactions.
Such prudence is also seen to have ensured that India
remained unaffected by the contagion unleashed by
the East Asian financial crisis in 1997.
Some issues
During the 1980s liberalisation had resulted in a
widening of its trade and current account deficits, a
sharp increase in external borrowing from private
markets and a balance of payments crisis in 1991.
Financial liberalization was partly an outcome of the
process of adjustment chosen in response to that crisis.
India had been on the verge of substantially liberalizing
its capital account, when the East Asian crisis aborted
the process.
Other influences
Obstacles to import-substituting growth. Trade
liberalisation adopted on the grounds that it would
help restructure domestic economic activity, render
firms and other economic agents in India
internationally competitive, and put the country on an
outward-oriented, export-led growth trajectory.
But BoP constraints. ‘Opportunity’ created by the rise
of finance capital.
External liberalisation to facilitate capital inflow.
Internal liberalisation to attract the carriers of capital.
The post-1991growth story
Why 1991? Crisis driven turning point. Comes decade
after post oil-shock changes in global financial
environment. Dramatic shift in policy regime.
Three episodes of high growth: 1994/95-96/97 and
2003/04-07/08 to 2013/14-15/16.
2003-07 particularly remarkable: High growth, high
savings and investment rates, higher corporate saving
and investment, strong reserve position
However, the growth story less convincing now.
What (besides policy) really
changed after 1991?
Post 1991 crisis: India becomes an attractive “emerging
market” for foreign portfolio investors.
Rose sharply to $4.2 billion in 1993-94 and averaged about
$6 billion during the second half of the 1990s. Max $8.2 bn
in 2001-02.
Capital surge from 2003-04 starting at $15.7 billion and
rising to an average of around $65 billion during 2009-12
and $74 billion in 2014-15.
The stock of foreign institutional investor capital increased
from $827 million at end-December 1993 to US$ 226
billion recently.
Real Growth: The long view
After 2003
Huge excess of capital inflow into the country when
compared to its current account financing needs.
If we take the cumulative sum of the excess of the
capital inflow relative to the current account deficit,
this has increased consistently since the first quarter of
2001-02 to the fourth quarter of 2008-09, and since
then has more or less remained near that level.
New financial framework
Transformation of banking
Expansion of non-bank financial activity
Financial sector becomes a site for profit
appropriation.
Capital gains replace dividends as source of financial
gain, leading to engineered asset price inflation.
Activities outside the financial sector reshaped by
finance.
Growth impact
Financial investors respond adversely to excessive debt
financed public spending putting pressure on the
government to deliver on its promise of fiscal reform
and consolidation Since that requires trimming
government expenditure to reduce the deficit, growth
is impacted adversely.
But in the new environment growth rides on a credit
bubble.
The credit splurge
One consequence of this surge in flows was a
significant increase in liquidity in financial markets as
foreign investors converted hard currency capital into
rupees for investments.
This triggered a credit splurge, with banks that were
flush with funds providing loans to a much larger
universe of borrowers. Growth ensued.
Credit Expansion
Where did the credit go
Sharp increase in the retail exposure of the banking
system, with overall personal loans increasing from
slightly more than 8 per cent of total non-food credit in
2004 to close to a quarter by 2008.
Use of the banking system as an instrument to further
an aspect of larger liberalisation agenda, which was the
entry of the private sector into core infrastructural
areas involving lumpy capital intensive investments in
power, telecommunications, roads and ports and
sectors like civil aviation.
Prospects of a downturn?
Dependence on capital flows for growth.
Uncertainty and policy impact.
Debt drives high growth, but signs of slowdown.
Public expenditure difficult to revive.
Monetary policy ineffective.
Distorted development.
Path dependence
Any effort to challenge and/or reverse neoliberal
economic policies inevitably leads to the exit of
portfolio and “footloose” productive capital,
precipitating a crisis of sorts that must be endured if an
alternative strategy is to be experimented with.
Gives rise to the view that any attempts at a transition
to some form of an alternative to neoliberalism would
lead to capital flight and precipitate a crisis, making
the alternative impracticable in the new world
dominated by finance.