Fall of the Rupee and Tightening Speculative Grip – S M Paranjape

THE vice-like grip of international speculative capital is tightening considerably – and unmistakably – around the Indian economy. The process started with the sharp rise in the prices of agricultural produce a few years back, causing the prices of foodgrains and other essential items like fish, meat and poultry reaching unprecedented levels. This ensured that inflation, which had been contained to around 4-5 per cent per annum for about a decade after the inglorious reforms introduced by Dr Manmohan Singh in his first avatar as finance minister, suddenly catapulted to above 9-10  per cent per annum, heaping miseries upon the common people.


In the last two decades since globalisation, almost all social services have been whittled down, causing people to be at the whims and caprices of education barons, private health services and means of transport. Although the Reserve Bank of India (RBI) had struck a tough posture initially and kept raising repo, reverse repo rates and even bank interest rates to reign in inflation – as it stubbornly refused to come within the “comfort zone” of 6-7 per cent signalled by it – it too caved in to speculative pressures and lowered the PLR (Prime Lending Rate) recently. But the reality of high inflation, worsened by the steepest ever hike in petrol prices in a climate of falling world crude oil prices, was too much for even the RBI chairman Subba Rao to swallow. He has now held bank rates steady; and this was followed by the just announced hike in fixed deposit rates by the State Bank of India (SBI).


All this goes to show that high inflation has become endemic in the Indian economy even as it struggles against the vicissitudes of international finance capital (IFC) that is in a palpably deflationary mode. While the IFC combated “stagflation” in the mid-seventies in the wake of the mid-east oil shock, the Indian economy is caught in the pincer of high inflation within and flight of speculative capital to lucrative profit opportunities afforded by Quantitative Easing in the US and now Europe.


It is ironical, however, that Subba Rao blamed the high inflation in India on the higher incomes of the lowest income bracket (the BPL population) in India! While admitting the failure of the fiscal policies to curb inflation, the RBI chairman glibly pointed to the increased cash in the pockets of the rural poor, who he said “unlike us” (read HNIs) spend the largest proportions of their incomes on food and essential items! First the government dismantles the Public Distribution System (PDS), then allows the mountain of foodgrains procured from the farmers to rot – defying Supreme Court orders to distribute them gratis to the poor – and in the resulting condition of artificially high prices of essential commodities, compels the poor to spend all their income on bare survival, and which the RBI chairman has the gumption to say is the cause for failure of fiscal policies in reigning in inflation! Even elementary text book economics states that the poor and fixed-income earners are the worst sufferers of high inflation.




The fact of the matter is that India is right now hurtling headlong on the same path that was taken by the erstwhile East Asian “Tiger” economies just prior to their meltdown in the late 1990s. Besides inflation, another galling disease that has become endemic to the Indian economy in the two decades of liberalisation, privatisation and globalisation has been corruption, and that too at the highest levels. Even the top Army brass has not been free from graft charges ranging from defence equipment procurement to real estate dealings. And scores of officers of the much touted “Steel Frame” of India’s administration – the IAS – have been caught red-handed with lakhs and crores of rupees stashed away in their homes, and owning assets vastly disproportionate to their incomes! To this must be added the astronomical sums of unaccounted wealth lying in “safe havens” abroad!


Yet another commonality with the East Asian scenario of the 1990s is the role of the real estate sector, especially in the context of the setting up of SEZs (Special Economic Zones) and the the land grab that it spawned. This was the single most crucial factor in the cataclysmic fall in the Indonesian economy,whose rupiah was made worthless by speculators like George Soros in a matter of days! The yawning gap between the persistently high property prices especially in the urban areas (one plot has appreciated almost 50 times in just about a decade in Mumbai!) and the lack of demand exhibited by the increasing number of vacant/unsold residential properties is symptomatic of a monumental disaster that is waiting to happen!




Votaries of the “Free Market” wax eloquently about how markets are “essential” for “price discovery”. But the modern capitalist market economy is inconceivable without speculation where the sole aim is profit and that too maximum profit. Akin to the celebrated transformation of men into hats at the hands of Adam Smith (which observation we owe to Karl Marx), a modern day enterprise must first be converted into a tradeable security; and not just economic enterprises, but every economic entity from commodities and services to currencies must undergo this transformation. And then there is speculation (read betting) on the price-movement of these securities, and premiums associated with the correct bet. Then to maximise one’s profits and minimise the probability of a loss on the bet, there is hedging on the bets made.


What lies at the heart of all this betting and hedging is the complete ignorance of the “market-players” about the real price of the traded “security”! Because, unlike a commodity whose value is determined by the quantity of average socially necessary labour-time that goes into the making of that commodity – including labour-power itself – the underlying security is given an arbitrary price and then set afloat in the market.


The hype surrounding the recent IPO (Initial Public Offering) of the social networking site ‘Facebook’ and the subsequent ‘discovery’ that it was not worth anywhere as much as the demanded price, should serve as an example. It is not for nothing that every advertisement of any mutual fund comes with a statutory warning like that on a packet of cigarettes!


And that is also why there is an even greater premium on malpractices such as price rigging, insider trading etc. to which only a handful are privy. It is a matter of great shame for all Indians that two of our best brains, on the likes of whom we spend vast sums yearly in our venerable IITs and IIMs, will be rotting in US jails following their indictment and arrest for indulging in “insider trading”, ironically due to the persistence of a legal eagle, who also happens to be yet another among the Indian diaspora.


Only recently a major US bank has suffered a huge loss, (some estimates put it at $9 billion) in trades gone awry – underscoring the huge risks that are associated with gambling in securities, commodities, and above all currencies. And a well-known British bank has witnessed a spate of resignations from its top ranks for having manipulated the interbank lending rate (LIBOR) to the bank’s advantage.




While every type of financial “instrument” – asset / transaction/ investment / trade – which is under the ambit of International Finance Capital is fraught with risk, there are gradations of risk. Generally speaking, bank deposits of scheduled banks in India are considered “safe”, since the preservation of the deposited amount is guaranteed up to a certain limit by the government of India.


However, even this does not hold good always, as was seen when several cooperative banks failed in the recent past and their depositors were left high and dry, because of siphoning off of funds via dubious loans by the political big-wigs who were managing the banks. It is common knowledge that stock markets, whose crashes with the attendant losses heaped upon hapless investors, are clearly among the most risky financial instruments. But still greater risk is associated with currency trading, involving currencies of almost all of the world’s leading nations. Modern markets are all about the interplay of risk appetite and risk aversion.


This market came into existence in the mid 1970s after the disbandment of the post World War II Bretton-Woods system by the imperialist nations. Instead of exchange rates between currencies being fixed by concerned governments, they were thrown open to trading and their rates were determined as market rates. The advance of technology has now made this trading amenable not just to a small community of traders but to any individual world wide with access to the Internet. And, of course, with hefty bank accounts which can sustain losses of up to hundreds of US dollars! One expert, who has been in this trading right from its start, has noted that barely 5 per cent of traders make profits in currency trading; and another has compared a currency trade to a rabid dog that can suddenly turn back on you and bite off your hand! But since the lure of making a quick profit is far too tempting, lakhs of participants throw themselves headlong into it, not unlike the sacrifice by devotees before the Rath of Lord Jagganath (whose imagery was vividly invoked by Marx in “Das Capital”). While a fall in the price of a share held by you in the stock market will result in a loss to its holder (viz. you) one can make make a profit in a currency trade irrespective of whether it moves up or down. Because, if you are speculating on its further fall in a falling currency scenario (like the Indian rupee at present), your bet will come good and bingo! you have made a profit! Vice-versa for correctly getting onto the bandwagon when the currency is rising. Notice how heartlessly you have to set aside your “patriotic” prejudices if you are to make a profit out of the fall in your currency.


In either case you have to pay an up front trading fee which is either lost if your trade was a losing trade, or else it is recouped by you in a profitable trade. But the real winner is the underwriting bank which provides the “margin money”, because it retains the trading fee in each and every trade! And because the volumes of currency trading are truly mind-boggling and have been cited quite often even in the documents of the CPI(M) ($4 trillion per day!), the total garnered by the bank becomes sizeable.


The fall in the rupee would have been a cause for celebration, if we had been a predominantly exporting nation. A visiting Japanese economist even advised us not to be disheartened but to take advantage of the falling currency and promote exports vigorously! Consider the fact that the United States wastes no opportunity to chide the Chinese government for keeping the Yuan at a low value; to allegedly benefit in the export of its products to the developed world and the US in particular.


But India depends on voluminous crude oil imports, which have to be paid for in dollars, and Iran is not allowed to sell it to us in rupees. Hence even though international crude oil prices crashed by over 20 per cent, it did not give us much comfort because the rupee too fell by about 12  per cent during the same period. In this scenario the advise given by the chief economic advisor to the government of India that diesel prices be set afloat to match world price movements would translate into added inflation of at least 10-15 per cent being imported into our economy. Curtailing wasteful expenditure by the rulers, and their cronies: Rs 25 lakh for renovating a single toilet in Yojana Bhavan, doling out Rs 20 lakhs apiece to legislators in Uttar Pardesh for purchase of luxury cars to match the mindless elephant statuettes, are cases in point.




(There IS Another Alternative as opposed to There is No Alternative) There are alternatives to the risk-based path towards self-destruction being adopted by the captains of “advanced” capitalism. Iceland has shown that the IMF-World Bank combine and their prescription can be rejected without falling off the cliff.


Much of Latin America that had been written off following a “lost decade” in the 1980s is moving ahead without the millstone of debt around its neck. And countries like Cubahave shown that a nation need not be chained to the growth model pedalled by the profit-at-any cost prescription.


The fact of the matter is that prescription entails retaining the foundation of risk, and indeed higher and higher risk. Advocates of defined contribution pension, who wish to do away with the right to dignity for the aged won by the world’s working population, must be made to realise that the rest of the society will not accept their diktat, which will not only take away the rights of present day pensioners, but of all generations to come. And ditto for the other components of social health,viz. medical benefits, education, and safeguarding of the best in the cultural traditions of mankind that make us human.

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