Courtesy: Research Unit for Political Economy, Mumbai
Opening to Foreign Investment in Government Bonds
It is now the 75th year since the end of British rule in India. The upcoming anniversary promises a rich vein to be mined for official publicity. The Information and Broadcasting Ministry has directed the print, electronic and digital media to display the newly minted logo of “Azadi ka Amrit Mahotsav” “so that citizens are made aware of India’s rich history and commitment to a bright future.” As the drumbeat of official Amrit celebrations gets steadily louder, each Central ministry is doing its bit; every public sector unit is scurrying to complete its quota of patriotic activities before it gets privatised. All this, no doubt, will rise to a climax on August 15, 2022 in the form of a grand sound-and-light spectacle celebrating an independent, atmanirbhar, and fully vaccinated India.
Meanwhile, the Indian authorities are putting the finishing touches on a financial regime that will perpetuate an unprecedented level of control of India’s economic policy by foreign investors, overruling any lingering considerations of the needs and demands of the Indian people. It is important to grasp that this move has no other rationale whatsoever, even by the most conventional textbook economics. The simple mechanism through which this regime is to be instituted is large-scale foreign investment in government bonds. Below we outline how this works.
Foreign investment in government bonds: part of a perverse cycle
Like most governments, the Indian government has long borrowed money by issuing bonds to investors in its capital markets, including to domestic banks, insurance companies, and others. Till recently, however, Indian governments have either barred foreign investors in such bonds or restricted their total investment, conscious that large movements by such investors into and out of these bonds can destabilise Government finances, the value of the rupee, and the economy as a whole. But for the last few years, the Indian government has been on a single-minded drive to attract inflows of foreign investment into government bonds, shaping the entire economy to this end.
Internationally, a number of countries, including some developing countries, do allow foreign investors to invest in their government bonds. For investors from the developed world, the attraction of these bonds is that they are relatively stable, since they are backed by governments, not private companies; and the interest rates are much higher than could be earned in the developed world, particularly in the present phase of rock-bottom interest rates there. International investors spread their risk further by investing, not in just one or two bonds, but in a basket of such bonds of different countries.
The presumption behind this, of course, is that the country needs that foreign investment. And on the face of it, it seems obvious that a country with scarce capital and a budget deficit would benefit from an ample flow of foreign savings into it. But leaving aside any more fundamental questions regarding the benefits and costs of foreign investment, the question must first be asked: when foreign investors buy Indian government bonds at present, are foreign savings indeed entering the Indian economy as such? Do they add to economic activity in India? The reality is, no. In a perverse cycle, what happens is that foreign investment flows into such bonds, only for the Indian government to re-invest it abroad at a much lower interest rate.
Drained by the circuit of capital flows
To see why this is so, it is important to understand that a country can only avail of foreign savings to the same extent it runs a Current Account Deficit, or CAD. Broadly, a CAD occurs when a country’s imports are larger than its exports.[2] If a country imports more than it exports, it needs to pay for that deficit from somewhere; so it avails of foreign savings in order to do so. These foreign savings enter in the form of capital inflows, i.e. mainly loans and investment (grants are negligible). But what if the capital inflows are more than the CAD?
Consider the case of a person who has spent Rs 1000 more than she earns.[3] She can pay the difference by borrowing money from someone else’s savings. However, if she is forced to borrow Rs 2000, double the amount she needs, of what use to her is the extra Rs 1000? She would have to put it away, say, in a bank deposit. In the unlikely event that the bank pays her higher interest than she is paying out, she would of course gain from the whole transaction; if the bank pays her lower interest than she is paying out, she would lose.
The case of a country is similar in this respect. Any inflows of foreign capital in excess of the current account deficit have to be parked in investments abroad. Consider two contrasting cases:
(1) If the borrowing country’s own interest rates are low, and the returns it gets on its foreign investments are relatively high, it can keep recycling its inflows and make gains on that circuit of capital. Such is the case of the United States. This mainly reflects the fact that the US is still the world’s leading imperialist power, and its dollar is therefore still a safe haven in which countries and private investors around the world park their capital.
(2) However, if the country’s interest rates are high, but the returns it gets on its foreign investments relatively low, it is drained by that circuit of capital. That is the case of India – a reflection of India’s actual subordinate status in the global economic order.
The existing burden of excess inflows
Existing inflows of foreign capital into India come in different forms – when foreign firms invest directly in firms here (foreign direct investment, or FDI[4]), when foreign investors buy shares in India’s share markets (foreign portfolio investment, or FPI), and foreign loans made to Indian borrowers. These inflows are already much larger than India’s current account deficit, i.e. they are more than India needs to pay for the gap between its imports and its exports.[5]
The RBI keeps buying up these excess inflows of foreign exchange and adding them to the country’s foreign exchange reserves, as a result of which India’s forex reserves keep reaching new peaks – $637.5 billion on October 1 this year, enough to pay for 18 months of imports. The foreign exchange reserves shot up more than $87 billion in 2020-21. It was a year in which the lockdown and the depression of demand caused imports to fall steeply. India actually ran a current account surplus of $23.9 billion that year; it did not require even a dollar of the capital inflows.
The RBI holds these reserves by investing in stable assets abroad – the biggest of which are US government borrowings, called ‘Treasuries’. At end-August 2021, $217 billion, or more than one-third of India’s reserves, were in US Treasuries, and India was the world’s 13th-largest holder of Treasuries.
Why then is the Indian government intent on soliciting yet more foreign inflows?
The principal argument made by advocates of opening up to foreign investment in government bonds is that it will reduce the interest rate on Government debt, and thereby save the Government money. On closer examination, this turns out to be untrue. Even if the interest rate were to decline due to the foreign inflows, the Government is forced to incur certain other fiscal costs on these inflows, and these other costs are multiples of any projected saving on interest rates. (For an explanation of this, see the original article available on RUPE website). Moreover, if the entry of foreign investors in government bonds results in the effective interest rate declining, what would happen if, for any reason, they decide to depart in large numbers? The reverse would take place, namely, interest rates would rise, and do so more precipitously, since a sharp fall in bond prices might trigger a panic. This possibility is not hypothetical; it has happened time and again with country after country.
National drain
More importantly, there is a national drain on account of this flow of funds in and out of the country. The interest the RBI earns on its foreign investments is minuscule: just 2.1 per cent in 2020-21, far below the rate it pays on its borrowings. By contrast, the 10-year Indian government bond is currently trading at a ‘yield’ of 6.32 per cent (October 28). And the return on other foreign investments in India is much higher.
In an important study of 2008,[8] Nirmal Chandra calculated the annual drain from India as at end-2007, and found it to be comparable to the annual drain under British rule. He provided two alternative estimates, taking returns on FII investments to be between 15 per cent and 25 per cent (the Government does not provide data on this critical question). At the time, the annual returns on the foreign exchange reserves were 4.6 per cent, and the reserves were at $275.6 billion, so the returns were $12.7 billion. On the other hand, the outflow came to $42.9-$68.5 billion. The net outflow, at $30.2 billion-$55.8 billion, was thus 2.6 to 4.7 per cent of GDP.
Citing A.K. Bagchi’s estimate of the annual drain/loot under colonial rule (4.0 per cent of GDP for the period 1911-16), Chandra observed that this lies within the range of estimates for the present-day drain. He marked that “while the drain during the autocratic British raj could be estimated from published data, our democratic government after 1991 skilfully camouflaged profit-taking by the FIIs.”
Interestingly, while the size of the foreign exchange reserves today is more than double the figure at the time Chandra made his calculation, the rate of returns India earns on those reserves is less than half the rate in 2007 (dropping from 4.6 per cent to 2.1 per cent). Hence the absolute sum earned on them would be about the same today as estimated by Chandra for 2007. Whereas the rate of returns that foreigners earn on their investments and loans is unlikely to have fallen. Hence the net outflow should be larger than Chandra estimated at that time.
In the October 2021 RBI Bulletin, the RBI points out its predicament: the interest rates on government bonds of developed countries are desperately low, near-zero or even negative (see Chart 1 below); “This low yield environment has made it an arduous task for the Reserve Managers to generate reasonable returns on their foreign assets.” It suggests various possible ways of increasing returns by investing in riskier foreign assets, including in share markets abroad.[9] There are also reports that India’s Reserve Bank is contemplating using outside experts (presumably foreign firms) to manage the reserves in order to get better returns.[10]
Now that the RBI has opened up government bonds to foreign investors on a large scale, the foreign exchange reserves, and the net outflow, would rise further. Moreover, not all foreign investors would confine themselves to holding these bonds and earning interest on them. These bonds are traded every day in the bond market, and their prices rise and fall. Foreign investors will actively trade these bonds, like shares on the stock exchange, and earn profits on buying and selling them. It is for this reason that index-providing firms are insisting that the Indian government do away with the capital gains tax on trading in government bonds. These trading profits are likely to be much higher than the interest rate on the bonds, thereby increasing the drain.
The proposal to get Indian government bonds listed in global bond indexes has been under discussion since at least 2013, but it was considered too risky. In 2016, the Modi government began increasing the process of raising the ceilings, and in 2018, it began negotiations to get India included in global indexes. Before the latest liberalisation (March 2020), there was a 6 per cent ceiling on foreign investment in Indian government bonds, but in fact foreign investment remained far below the ceiling, at only 2-3 per cent.
India’s index inclusion aspirations dictate its miserly fiscal response to Covid-19
On March 30, 2020, while India was locked down and the attention of the nation was focused on Covid-19, the RBI issued a notification opening certain specified categories of government bonds fully for foreign investors. It has clarified that more and more such bonds will be added to the ‘Fully Accessible Route’; at present about $200 billion of bonds are available.
The Government’s determination to stay on track for bond index inclusion helps explain why it was so tight-fisted induring its draconian lockdown of 2020, and has refused to increase spending through 2021 as well. (In July 2021, the cumulative Central government expenditure as a percentage of the budgeted expenditure for the year was just 23.8 per cent, compared to a 10-year average of 33.8 per cent. Central expenditure for the first quarter of 2021-22 was nearly 5 per cent lower, in real terms, than the previous year.[11]) That is, the Government plans to stimulate growth solely by providing the private corporate sector handsome profit-making opportunities, rather than directly stimulate demand through government spending.
The Government’s refusal to spend is intensifying the current depression in India, but this refusal seems to have won the approval of international finance. For example, a January 2021 report by one of the world’s largest asset management firms, State Street Global Advisors (India Sovereign Bonds: Index Inclusion on the Horizon), makes the case for investing in Indian government bonds.
Firstly, the report points out that India’s currency has been stable. But this ‘stability’ has been the result of its attracting large flows of foreign investment, and the RBI dutifully shoveling these flows into the foreign exchange reserves. In other words, the stability of the rupee depends on India continuing to be a well-behaved member of the club of those developing countries that adhere to policies approved of by foreign investors.
Secondly, the State Street report points out that the returns on Indian government bonds are attractive in comparison with those of other countries with a similar credit rating. Thirdly, it notes approvingly that India has kept down Government spending during the Covid-19 crisis much more than other developing countries:
India demonstrated a restrained fiscal response to the COVID-19 pandemic… JP Morgan estimates the fiscal impact [of economic stimulus measures] to be ~1.5% of GDP in Fiscal Year 2020–21, half the level undertaken by emerging markets, on average. (emphasis added)
Instead of boosting demand through Government spending, the report points out, India has relied solely on neoliberal, pro-corporate restructuring as a growth strategy:
The government had been implementing several structural reforms before the pandemic, with corporate tax rate cuts, a bankruptcy law to facilitate resolution of non-performing assets, and steps that improved the ease of doing business. Progress in reforms continued after the outbreak as well, with the government expecting this strategy to help stoke a robust medium-term recovery. There have been announcements in production-linked incentives for manufacturing, relaxation of manufacturing sector labour laws, opening up state monopolies in coal mining, railway services, and power distribution to the private sector, introducing incentives to encourage formal employment and removing barriers to agricultural trade by allowing farmers to enter into contracts with private companies. (emphasis added)
It is important to realise that, once foreign investors have a significant share of Indian government bonds, the above policies cannot be reversed or even seriously modified without triggering a negative ‘vote’ from the bondholders.
Fear of foreign investors will act as “an additional source of fiscal discipline”
This is quite candidly stated by Jehangir Aziz, the global head of J.P. Morgan Emerging Markets Economics, in an interview with Bloomberg Quint. A word of explanation is required regarding two terms he uses: “shorting” and “going long”, which refer to operations in speculative markets. In the share market and other financial markets, investors “go long” when they buy a share or bond, anticipating its price will rise. But if they anticipate its price will fall, they may also short sell (or “short”) a share or a bond by selling it even when they do not possess it at the time (they can borrow it temporarily, buy it once the price has fallen, and then return it). At present there is limited scope to “short” government bonds, since trading is quite thin. The main holders of government bonds are entities that park their investments in such bonds till maturity and do not actively trade – banks, insurance companies, the RBI, provident funds, cooperative banks and other financial institutions. Foreign investors’ investments earlier were capped at a relatively low level. Hence there was less scope for them to “short” Indian government bonds. However, if foreign investors form a sizeable share of the market, and the number of domestic investors too increases (for which the RBI is currently taking steps), there is increased scope for such trading, and hence for “shorting”.
In such a market, for example, if some change in Government policy takes place which foreign investors disapprove of (for example, an expansion of Government spending), they could “short” government bonds and drive down their prices. This is what Aziz describes approvingly in the following passage:
I think it also does something that I think that, for lack of a better word, we haven’t managed to do, which is to provide an additional source of fiscal discipline that we hadn’t had. If you’re going to force the buyers of your bonds to be only long all the time, which is what we have done over the last 70 years, there’s no one who can short or who can take insurance against bad fiscal policy. Once you allow people who can actually short your bonds, I think there will be an added discipline, and again, that added discipline works. We have seen how other countries in the emerging market world – just neighbouring country, Indonesia – Indonesia has managed to keep its fiscal deficit below that 3 per cent level for almost like 10-12 years. And part of the reason is that a significant amount of discipline has been imparted on the Indonesian government. And to keep fiscal deficit at that level because of the fear that there is now a bunch of people who can actually keep insurance and who can actually react to bad fiscal policy, right? [12]
A triple blow would likely result if foreign investors short-sell government bonds as a reaction to fiscal policy they do not approve of:
(1) The effective interest rate on government bonds would rise, i.e., the cost of government borrowing will rise. Given the policy frame of the Government, it would cut on other expenditures in order to kep within its fiscal targets.
(2) The sudden exit of foreign funds would make the rupee’s value drop precipitously, making imports, including crude oil, more expensive and causing inflation to rise across the board.
(3) The flight of foreign investors from government bonds may trigger uncertainty about other bonds as well, and lead to a rise in other interest rates.
All these are not hypothetical, but have actually been observed in many countries when foreign investors exit government bonds.
Capital account convertibility
Beyond the explicit conditions placed by the index-providing firms (such as removal of restrictions, scrapping of capital gains tax on trading in government bonds, use of a depository abroad for settling bond transactions), there is a further unwritten demand: removal of all controls on capital movements in and out of India, what is called “capital account convertibility” (CAC). The RBI’s Tarapore Committee defined CAC succinctly as the “freedom to convert local financial assets into foreign financial assets and vice versa”.[13] In a word, foreigners can buy any Indian asset without restriction, and Indians can sell off Indian assets and transfer the money abroad. Foreign investors have long demanded this freedom, as have the top section of the Indian elite.
A recent speech (of October 14, 2021) by a deputy governor of the RBI says that, with the opening up of government bonds to foreign investors, “India is on the cusp of some fundamental shifts… The rate of change in capital convertibility will only increase… Market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility.”[14]
There are various degrees of CAC, and India is already at a fairly advanced stage of it. Both FDI and FPI investors are permitted to invest in almost all sectors (with a handful of restrictions in specific sectors), and are equally permitted to sell these assets and repatriate the proceeds. External commercial borrowing is also permitted with few restrictions. Indian citizens, including minors, can send out $250,000 a year under the Liberalised Remittance Scheme; a family of four can thus send out $1 million a year. And now the Government has opened government bonds to foreign investment, eventually without any restriction.
Virtually the only remaining step is to allow Indian citizens to sell their assets and transfer the proceeds out without restriction. Of course, making such transfers would really be practicable only for the top few per cent of the households in India. These households are also the owners of most assets: while Credit Suisse estimates that the top 1 per cent in India own 40.5 per cent of the total wealth,[15] their share of assets which can be sold off (unlike residential homes and land), is much, much higher. Capital account convertibility (CAC) opens up scope for massive capital flight. It would greatly amplify the impact of any sudden outflow of foreign investment: as dollars flow out and the rupee’s exchange rate falls, the Indian elite too might transfer their assets out at a faster rate. A large number of Third World countries, such as Mexico (1995), Indonesia, Thailand, South Korea (1997-8), and Argentina (2001), have experienced devastating episodes of capital flight.
Given these grave implications, why is the Indian government opening up government bonds for foreign investors and the Indian ruling classes welcoming it? There are two aspects to this: the push from international capital; and the Indian ruling classes’ own calculations.
The push factor: international capital wants to enter Indian government bonds
In the media, the topic is framed as India’s attempt to get its government bonds in global indexes, with index provider firms assessing whether India has fulfilled the requirements for inclusion. However, this ignores the fact that international capital wants the opening up of India’s government bonds market.
Essentially, the push from international capital for India to open up its government bonds is for two reasons:
(1) at present, there is a sea of money in the developed countries seeking higher returns elsewhere; and
(2) many underdeveloped countries had undergone a massive expansion of debt even before Covid-19, due to an earlier such flood of foreign investment inflows from the developed world. Now there is an impending debt crisis in those countries. Hence the developed countries’ financial investors must find new targets for investment. This is where India comes in: It is the last big hunting-ground for international investors in government bonds.
The Indian ruling classes’ own calculations
That explains why foreign investors want in. But, given that there are no benefits, only costs, for India from such investment, why are the Indian rulers striving for this?
Firstly, as is well known, India’s economy and political life have come under an unprecedented level of private corporate control; and the summit of India’s private corporate sector is now more closely integrated with international capital than ever. This takes the form of foreign loans, foreign portfolio investment and foreign direct investment. Surajit Mazumdar notes:
The spectacular expansion of Indian big business during the last two decades has heavily depended on, rather than being despite, international integration. Foreign capital flows and access to external capital markets has played an important role in enabling both domestic and overseas expansion of Indian capital. One expression of that has been the increased recourse to foreign financing by Indian firms. Capital inflows have also contributed indirectly; given India’s current account situation, they were essential requirements for the easing of norms for Indian investment abroad, and they have been important movers of the Indian stock market creating conditions whereby Indian firms could raise cheap capital. Access to technology and imports of capital goods and intermediate products where they are cheaper has contributed to the competitiveness of Indian firms and enabled them to find some niches in which they could grow, often in a collaborative arrangement with foreign capital.[16]
By June 2021, India’s non-Government external debt – essentially the foreign borrowings of the private corporate sector – amounted to $464 billion, or 81 per cent of India’s external debt, and 16.4 per cent of India’s GDP. The large flows of foreign capital into India, and the surging foreign exchange reserves, also make the Indian corporate sector less ‘risky’ in the eyes of foreign lenders, and allow the corporate sector to borrow more cheaply abroad. Indeed, their foreign loans have to an extent reduced their dependence on credit from Indian banks.
It is noteworthy that the large foreign exchange reserves have reassured the Government that they can relax restrictions on large outward foreign direct investment (OFDI) by Indian firms, which is a step toward capital account convertibility; at present automatic approval is given for outward investments up to 400 per cent of the investing firm’s net worth. Cumulative OFDI during 2000-01 to 2018-19 came to $179.5 billion.[17] A substantial portion of this may be ‘round-tripped’ capital, i.e., Indian firms sending out capital as outward FDI, and bringing it back in under another name (benami) as inward FDI. As one study points out,
It is clear that Indian OFDI flows are dominated by economies considered to have an advantageous fiscal regime such as Mauritius, Singapore, the British Virgin Islands, the Netherlands, Switzerland and Cyprus. In addition to possessing favourable treaties covering bilateral investment, double-taxation avoidance or comprehensive economic partnerships with India, many of these countries also offer low tax rates and access to international financial markets in order to attract Indian firms. As such economies are less likely to be the ultimate destination of Indian OFDI flows, one part of such flows may be redirected to other countries while another part could be round-tripping, i.e. coming back to India as FDI inflows.[18]
The returns on such outward FDI are likely to be lower than the returns on the inward FDI (the foreign firms to which such investment goes are shell firms, whereas the Indian firms receiving such investment are real firms). Hence such ‘round-tripping’ flows also act as a continuing drain.
Apart from such round-tripped capital, the top Indian firms are major recipients of foreign investment and loans. Mukesh Ambani has sold 33 per cent of Reliance Jio to US firms, and has given them places on the board; and foreign portfolio investors hold more than 25 per cent of the parent firm Reliance Industries.[19] Foreign inflows have helped propel Ambani to the position of the richest man in Asia and 10th richest in the world. The Tata group’s giant foreign acquisitions were funded in large measure by foreign borrowings. The Adani group is among the most indebted corporate groups in India, with outstanding loans of $30 billion, but is still able to tap foreign markets for capital without difficulty. It has sold large stakes in its firms to foreign giants such as Total, and “international groups are queueing up to partner with the mogul.”[20]
The extent of integration is exemplified by the first-generation Indian tycoon Anil Agarwal, a metal scrap dealer-turned-industrialist who profited greatly off India’s early privatisations. In order to get access to international capital markets in the 2000s, Agarwal incorporated the firm Vedanta Resources in London. Eventually the group became a multinational conglomerate headquartered in London, where Agarwal himself resides.[21]
Given the above, India’s corporate tycoons welcome measures for further integration of the Indian economy with international capital, such as opening the government bond market and moving towards capital account convertibility. They look forward to a situation in which they are completely free (they already are partly able) to move their capital in and out of the country, much in the way they themselves do.
But even as Ambani, Tata, Adani and Agarwal have all attempted to ‘internationalise’ their groups and have purchased assets abroad, their stakes remain overwhelmingly in India. Their efforts to expand internationally have so far seen at best minor successes, and also some spectacular failures. (Interestingly, Tata’s largest foreign acquisition has proved a disaster; the group has survived and been able to service foreign loans taken for the acquisition of Corus on the strength of its domestic operations. And while Vedanta is headquartered in London, most of its assets are in India.)
It is not Indian big business houses’ technological dynamism or industrial entrepreneurship that secure their dominant position in India. Rather it is their India-specific capabilities – viz., their ability to ‘manage’ the Indian State regulatory machinery and political forces, their ability to capture Indian markets through anti-competitive methods, and the influence they wield in Indian society. Those ‘native’ mercantile skills in turn ensure their access to foreign capital for their expansion. Correspondingly, foreign financial capital turns to these ‘Indian’ firms for access to India. As such, the relationship of India’s top corporate firms to the Indian economy is subsumed in the relationship of imperialism with India.
Thus the interests of the top corporate houses have in a crucial sense seceded from India itself, even as their stakes predominantly lie here. But there is a wider layer of India’s elite (sometimes mistakenly labeled ‘middle class’) that provides support for the big bourgeoisie’s agenda. This layer has strong links to the developed countries. Many plan to shift there (India reportedly experienced the highest percentage of out-migration of ‘high net worth individuals’ of any country between 2014 and 2017 – and perhaps thereafter too[22]), and many have relatives studying or residing there. The Indian media and the bulk of the intellectuals (including academia) provide intellectual justifications for these policies. Mark the near-complete silence on the issue of the opening-up of government bonds to foreign investors! Barring a solitary article by two well-known critics of the Government’s policies,[23] we are unable to find a single critical comment in the media regarding this decision. When Jehangir Aziz of J.P. Morgan told his interviewer that the benefit of opening up Indian government bonds was that foreign investors could “discipline” the Indian government automatically by their market movements, and determine the Indian government’s spending policies, his remark did not earn a reprimand or castigation; rather, the interviewer nodded sympathetically.
It should also be kept in mind that, even if the Indian rulers scrupulously follow the code of conduct laid down by international capital, there is a possibility of crisis – for example, if interest rates rise in the developed world; if there is a crisis in the developed world (as in 2008); or if a crisis in other developing countries leads foreign investors to move out of all such countries. In 2013, as the US Fed began ‘tapering’ its Quantitative Expansion, funds began to flow out of India and many other developing countries, and moving to the US. The resulting panic was blamed on the developing countries, not the US Fed’s massive expansion-contraction cycles. Thus in 2014 the US investment bank Morgan Stanley damningly labeled India and four other developing countries the ‘Fragile Five’. All this took place before significant foreign investment in Indian government bonds; imagine a similar episode after foreign investors own substantial shares of Indian government debt.
On the other hand, even if no crisis takes place, the fear of such a crisis will always remain as a disciplining rod. This is particularly so since India’s foreign exchange reserves are not built out of trade surpluses, but out of foreign loans and other liabilities to foreigners, and much of these may exit at short notice.
What was once done by a colonial force is now to a large extent carried out with the help of economic, social, political and cultural structures that have been developed over time to serve, not Indian interests, but imperialist ones. To fully grasp this phenomenon, we would need to bring in a historical approach.
At the same time, the vast majority of the Indian people have neither such ties, nor free mobility options open to them, as the elite. For them, the further integration of India with the global economy portends a grim future, marked by a depression of demand and instability. When the economy is drained, it is the surplus created by their labour that gets drained. When the economy is destabilised by foreign capital flows, it is their livelihoods that get destroyed. When the economy is ‘restructured’, it is their labour that gets devalued. It is they who will have to wage a struggle for real independence, a travesty of which is being celebrated this year with pomp and wind.
Notes
[1] Research Unit for Political Economy, Crisis and Predation: India, Covid-19 and Global Finance, pp. 139-152 https://www.rupe-india.org/CAP.pdf
[2] The Current Account nets out imports and exports of physical goods, imports and exports of services, unilateral transfers of money into and out of India, and payments and receipts of investment income (interest payments, profits on investment, royalties, etc.). India usually, though not always, runs a large deficit on trade in goods, a smaller surplus on trade in services, and a deficit on investment income, resulting in a Current Account deficit overall.
[3] We are re-using an analogy we used in Crisis and Predation, p. 151.
[4] Private equity (PE), when a group of private investors directly invest in a specific firm, is officially classified as a form of FDI. However, unlike other FDI, PE investors do not invest for the long run, but usually for periods of three to five years. At that point they sell off their investments at a profit and exit.
[5] It is true that a country can avail of more savings by increasing its current account deficit, i.e., increasing its imports. However, there is a catch: once the CAD rises to beyond 3 per cent or so, international investors start treating the country as a greater risk, and start withdrawing their investments – thereby pushing the country into a crisis.
[8] Nirmal K. Chandra, “India’s Foreign Exchange Reserves: A Shield of Comfort or an Albatross?”, Economic and Political Weekly, April 5, 2008.
[9] RBI, “The low yield environment and Forex Reserves management”, RBI Bulletin, October 2021.
[10] Pattnaik, op. cit.
[11] Manasi Swamy, “Goverment’s puzzling reluctance to spend”, https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=20210903152315&msec=056
[12] Interview with Bloomberg Quint, September 28, 2021 https://twitter.com/BloombergQuint/status/1442790449693876229
[13] Cited in “India’s Capital Account Management – An assessment”, speech delivered by Deputy Governor Shri T Rabi Sankar on the Fifth Foreign Exchange Dealers’ Association of India (FEDAI) Annual Day on October 14th, 2021.
[14] Ibid.
[15] Credit Suisse Global Wealth Report 2021.
[16] Surajit Mazumdar, “‘Emerging’ Third World capitalism and the new imperialism: the case of India”, in Sunanda Sen and Maria Cristina Marcuzzo, eds., The Changing Face of Imperialism: Colonialism to Contemporary Capitalism, 2018, p. 322.
[17] Reji K. Joseph, “Outward FDI from India: Review of Policy and Emerging Trends”, Institute for Studies in Industrial Development, Working Paper 214, November 2019.
[18] Jaya Prakash Pradhan, “Indian outward FDI: A review of recent developments”, Transnational Corporations, vol. 24, no. 2, June 2017 https://unctad.org/webflyer/transnational-corporations-vol-24-no-2
[19] See RUPE, Crisis and Predation, pp. 167-73.
[20] Stephanie Findlay and Hudson Lockett, “‘Modi’s Rockefeller’: Gautam Adani and the concentration of power in India”, Financial Times, November 13, 2020
[21] https://en.wikipedia.org/wiki/Anil_Agarwal_(industrialist)
[22] Rahul Varman, “Citizenship and the Nation of the Rich in India”, April 1, 2020, https://rupeindia.wordpress.com/2020/04/01/citizenship-and-the-nation-of-the-rich-in-india/
[23] C.P. Chandrashekhar and Jayati Ghosh, “The growing perils of India’s open capital account”, Hindu Business Line, April 21, 2021.
(This article is an extract from a longer article. For the original article, please visit rupeindia website. Research Unit for Political Economy is a Mumbai based trust that analyses economic issues for the common people in simple language.)
