“The Risk of a new Great Depression, worse than the original is rising by the day”.—Nouriel Roubini
“This could morph into a financial crisis. We will see higher default rates and business failures. It could be like the 1930s”. —Carmen Reinhart (Prof. of Economics & Finance at Harvard Kennedy’s School of Govt.)
“Worst Financial Crisis since the Great Depression of 1929”. —CNBC veteran analyst
Jim Richards, former advisor to the CIA and Pentagon as also the Fed, has warned of a five-step domino effect in the US (likely in the very near future, he says):
1st Depression leading to massive unemployment, with more than 50% of those at work at risk. With people locked up and no purchasing ability due to unemployment and isolation there will be no demand for goods. And with the lockdown for the first time in history we have a demand and supply shock. As this crisis does not start with a financial collapse (as 1930 & 2009), cutting interest rates and pumping in money will not have long term effect to revive the economy.
2nd The next domino will be massive bankruptcies as there will be no demand for goods so no sales.
3rd The contagion will spread to Real Estate as people will not be able to pay their mortgages ….. this $16 trillion market will crash.
4th The fourth domino will be a collapse of the banking industry with a credit crunch, due to the collapse of peoples’ credit and bankruptcies in industry.
5th Complete collapse of our society and rule of law. Already secret talks preparing for martial law are taking place within the military.
This maybe a worst-case scenario, but the facts on the table certainly push in this direction. In fact, two sceptres are haunting the world. Covid-19 and an economic catastrophe. Covid is but a continuation of the numerous strains of viruses to hit the world in the last couple of decades. The latter is reviving memories of the horrors of the Great Depression of the 1930s and the mass destitution that went with it. Which of the two will be more lethal it is difficult to say just of now, but already in India we see the plight of millions of migrants who neither have food to eat nor transport to go back to their villages; and the trauma of millions of others who are locked up in their houses (mostly 10×10, with entire families) with their source of earnings destroyed. The future is most uncertain; probably a cocktail of the two may devastate entire regions of the world, far worse than the Great Depression.
The reality is that the major economies of the world were already moving into a severe crisis by the end of last year, far worse than the Great Recession of 2008/09; moving in a direction similar to (or worse than) that of the 1930s. The crash seemed inevitable, Covid or no Covid. The lockdown has, ofcourse, aggravated the already bad situation 10-fold.
A number of questions arise in this twin scenario. First, where would the world economies have headed had there been no pandemic/lockdown? Second, why is it that in the last few decades, continuous new strains of viruses, each more deadly than the other keep appearing? Third, was such a drastic measure as “social distancing” and “lockdown” the only way to have dealt with it, or could some other more effective method have evolved which was not so damaging to the economy and peoples’ lives? Fourthly, what is the source of this virus (or the earlier ones); and why was it necessary for 62 countries, including India, to pass a resolution at the World Health Assembly (part of the UN) to “identify the zoonotic source” and ask for an “impartial, independent and comprehensive evaluation” of the WHO’s response to Covid-19 (which was primarily responsible for pushing worldwide the method adopted —- social distancing and lockdown)? And ironically why are the two most suspect countries — the US and China — refusing to be part of this resolution? Zoonotic diseases are those transmitted from animals/insects to humans, like bird flu, swine flu, Nipah, Ebola, dengue and many of the earlier ones like malaria
These questions and many more remain unanswered and with the international media having only a singular focus, people are getting confused about the reality, as some issues defy logic; quite naturally numerous theories are doing the rounds. Yet, let us try and decipher some of the truth through this maze on the economic front alone, and first start with the state of the economy before lockdown, which started towards the end of March 2020 after WHO declared it as a pandemic on March 11 2020.
- State of World Economy before the Pandemic.
All the developed economies of the US, Europe and Japan were already in a severe state of decline well before the pandemic broke out. Let’s take the US first, by far the largest economy in the world. Even before the pandemic the US economy contracted by a massive 4.8% in the first quarter of 2020, the worst since 2008; it had been consistently cutting interest rates from 2.5% to 1.25% and then on March 15, 2020 to zero percent. It also unleased the standard quantitative easing (QE) package of $700 billion, later raising it to the highest ever of $ 3 trillion. QE (essentially printing notes i.e. borrowings) and low interest rates have been the two standard monetary panacea for economies in crisis.
Japan, the third largest economy in the world, has been stagnating for years and in the last quarter of 2019 itself, it contracted by a massive 7.1%. Desperate to get through the storm it passed several stimulus packages and approved the largest package in its history of $ 530 billion, later raised stepwise to a massive $ 2 trillion. Interest rates in Japan have been below zero for a long time.
If one turns to Europe, we find that in the first quarter of 2020; (Jan — March), Germany’s economy contracted by 2%, France’s by 5.8%, Italy’s by 4.7%, Spain’s shrank by a historic 5.2 percent, far surpassing the previous record of 2.6 percent in 2009. The UK shrank by 2% and the other European countries were even worse. Regarding the UK the Guardian reported in its edit (May 15 2020) that the economy was already slowing in February and in March it shrank 6%, the highest since records began in 1997. Like all the other countries it is pumping in huge amounts to keep the economy afloat. The Bank of England forecasts the recession will be the worst in 300 years.
The European Union economy as a whole shrank 3.5% in the first quarter of 2020, the worst quarterly drop since the bloc began collecting data in 1995. Interest Rates across Europe on March 20 were all around 0% while that of UK is 0.1% Denmark was -0.6% and Switzerland was -0.75 %. With renewed signs of economic weakness, the ECB pushed its benchmark interest rate further below zero in September 2019, to minus – 0.5 percent. Sweden, Switzerland and Denmark have also stuck with rates in the red, as has Japan. All this, long before the lockdown was initiated.
China’s economy, the second largest in the world, contracted by 6.8% in the first three months of 2020 from the same period a year ago — its biggest drop in nearly three decades, as the country’s factory output and domestic spending ground to a halt amid the unprecedented shock of the coronavirus pandemic. Ofcourse, this was after the corona virus hit it.
Not only that, commodity prices began crashing by end February itself. US oil prices lost half its value in less than two weeks in the latter half of February having plunged to $24.5 a barrel, lowest since 2003.
These figures need understanding. In 2017 itself I had written from jail [in the article: “India and the Evolving New World Order” in the Sept 18 2017 issue of Mainstream] that “With all indicators down, the Economist warns that Sod’s Law decrees that sooner or later, policy-makers will face another downturn. And, it adds, the danger is that this time, having used up their arsenal (that is, of monetary manipulations of QE and low interest rates) governments and central banks will not have any ammunition left to fight the next recession.”
Earlier in the same article I had warned that “Despite such desperate measures, massive QE and near-zero interest rates and even negative interest rates revival seems far off, and economic decline continues. In the five years to end-2016, the profits of the MNCS have fallen by 25 per cent. Returns on investments declined to their lowest in two decades. The majority of the giants have recorded sluggish growth. According to an UNCTAD report, growth rates of Europe and Japan continue to stagnate at near-zero levels while in the US it would slow to 1.6 per cent in 2016 (in fact, in the US, Quarter One growth of 2017 was the lowest in three years at 0.7 per cent). It reported that global trade growth has slowed even more dramatically to just 1.6 per cent in 2016, a full percentage point lower than the world output”.
I further added in that article even before the crisis, according to Thomas Picketty, during the entire period of globalisation, only the top one percent have made phenomenal wealth while the rest have lost out horribly. And after 2008, conditions have further worsened due to austerity measures of the various governments. Money for welfare was diverted to bail out the banks. For example, the UK has resorted to austerity measures on a scale never seen in living memory, cutting welfare payments, pensions and government-funded services. Those in employment are earning 15 per cent less than what they earned a decade ago (which was already low due to years of globalisation) and students emerge from the university saddled with debts of $ 40,000 (Rs 30 lakhs).
It was clear from all this, that after the Great Recession of 2008-09 a severe crisis was in the making as they were not able to recover; and in spite of desperate measures could just manage to keep their economies afloat. Though there have been continuous cycles of crisis since world war II in the US economy [1957, 1960, 1973, 1980, and 2001 Dot Com crash] and the world none was as severe as that in 2009, which almost took the form of the Great Depression of the 1930s. But even in this, GDP shrank 4.3% in the 18-month recession while unemployment peaked at 10%, which is minor compared to what we are seeing today.
In other countries of the world the situation has been even worse. The economic crisis in the 1990s that struck former members of the Soviet Union was almost twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s. Average standards of living registered a catastrophic fall in the early 1990s in many parts of the former Eastern Bloc, most notably in post-Soviet states. Even before Russia’s financial crisis of 1998, Russia’s GDP was half of what it had been in the early 1990s. Some populations are still poorer today than they were in 1989 (e.g. Ukraine, Moldova, Serbia, Central Asia, Caucasus). The collapse of the Soviet planned economy and the transition to market economy resulted in catastrophic declines in GDP of about 45% during the 1990—1996 period and poverty in the region had increased more than tenfold.
It was in this continuing scenario of world economic crises (baring China) that we must view the massive downturn pre-Corona lockdown. Given these factors even if there had not been a lockdown the economic crisis would have likely reached levels of the Great Depression; now it will be much worse. Yet the media says not a word on the state of the world economy prior to lockdown, and the pandemic came coincidentally at the same time as the economic crash. And if at all they speak about the crash in the economies now, they blame is conveniently on the pandemic. This distorts the full reality and presents only a half truth.
Now let us turn to the impact of the lockdown on the economy.
- Impact of the Lockdown
On Jan.30 2020 the WHO (World Health Organisation) declared Covid-19 a “public health emergency of international concern”. Till then the number of deaths outside China were a mere 170 and cases suspected were 7,736 worldwide. Hardly something that would warrant a “public health emergency of international concern”. Then on March 11th the WHO declared it a pandemic after deaths ‘attributed’ to Covid-19 by John Hopkins University rose to 4,300 worldwide. The term “attributed’ is important as it doesn’t directly say deaths ‘caused’ by Covid-19. In other words, even these ‘deaths’ were speculative and presumptive, not definite; yet it was declared a pandemic with just 4,300 worldwide. Strange, to say the least!
Leaving aside whether the lockdown was the best option for the time-being, even conservative estimates give the impression that the lockdown, on the back of an already severe decline in the economies, is going to be mind-boggling; far worse not only than the Great Recession of 2008-09, but even of the Great Depression of the 1930s. We have already seen in the first quarter (i.e. before the lockdown came into full force) most major economies were already in severe recessions; biggest on record.
If we look at comparative figures, during the Great Depression the global GDP declined by 26.7% in the 43 months of its existence between 1929 and 1933 ——- i.e. roughly a contraction of 6.5% each year. In the Great Recession of 2008-09 the GDP in the US fell by 4.3% and did not recover till 2011. Employment fell by 8.6 million. If we take comparative figures for today, we find that Goldman Sachs has predicted a second Quarter fall in the GDP of anything between 26-40% in the USA, and, till end April as many as 26 million people have filed for unemployment. This time the US has fielded the biggest stimulus package in its history of $3 trillion and interest rates have also been reduced to zero overnight.
If we look at other economies the IMF predicts a decline of 8% for 2020 for the EU with UK contracting 30% in the first half of the current year, Italy contracting 18% in the second Quarter.
The coronavirus (COVID-19) pandemic is affecting the economies of Latin America and the Caribbean through external and domestic factors, the combined effect of which will lead to the worst contraction that the region has ever undergone, exceeding those seen in 1914 and 1930. According to the latest estimates, an average regional contraction of -5.3% is forecast for 2020, ECLAC (Economic Commission of Latin American Countries) indicated while launching a new report.
Analysts polled by Reuters expect Japan’s economy to shrink 22% during the April-to-June period, which would be its biggest decline on record. The Japanese government has already announced overall a record $2 trillion stimulus package, amounting to over 40% of its GDP, and the Bank of Japan expanded its stimulus measures for the second straight month in April.
The IMF has conservatively predicted a contraction of the world economy of 3%. It is estimated that there will be an output loss of $ 9 trillion (i.e. over 3-times India’s GDP) worldwide. The figures are likely to be far larger as the lockdown seems to be continuing.
Such pandemics themselves, are a result of the present-day economic policies which destroy our environment and thereby weaken the immunity levels of not just humans but also animal resulting in a spurt of zoonotic (that transmit from animals/insects to humans) diseases. The WHO in its report says “the 21st century has already been marked by major epidemics. Old diseases – cholera, plague and yellow fever – have returned, and new ones have emerged – SARS, pandemic influenza, MERS, Ebola and Zika. ……..The diseases covered are: “Ebola virus disease, lassa fever, Crimean-Congo haemorrhagic fever, yellow fever, Zika, chikungunya, avian and other zoonotic influenza, seasonal influenza, pandemic influenza, Middle-East respiratory syndrome (MERS), cholera, monkeypox, plague, leptospirosis and meningococcal meningitis.” Why have these taken such a jump in the last two decades. Studies have shown that it is the result of the rape of nature not only by real estate but, what Vandana Shiva calls the ‘poison cartel’. And if one adds to this the massive destruction of our soils, indigenous seeds, massive use of fertilisers, pesticides, hormones and other chemicals in our food chains we not only get a spurt in these diseases but also cancer, kidney failures and a host of new diseases. In fact, the fatality numbers of some earlier pandemics, such as the Asian flu, 1957-58 (1.1 million dead) and Hong Kong Flu, 1968 (2 million dead), and even the 2009 pandemic the deaths have been huge. At present the number of deaths from covid-19 in the three months to end May is 3,14,687. One of the most comprehensive studies on the pandemic, by the Imperial College of London, shows that the “case fatality rate”, or fatality among those who get Covid-19 is 0.9 per cent —
In essence, the overall cause of both pandemics as also the economic crisis are the present parasitical capitalist/financial system where, as returns on capital in manufacturing keep declining ever new spheres of extraction have to be discovered, no matter what its impact of the environment or on the health of the people. And in this digital age it is turning more and more parasitical thriving off finance, speculation and trade and worst of all diseases rather than manufacturing. The Deep State is no longer the military-industrial complex but the military-industrial-digital-pharma complex that runs the world. As Vandana Shiva put it is the three companies that dominate the ‘Poison Cartel’ with the mergers forming the big-3. They are: Monsanto-Bayer, Dow-Dupot, and Syngenta — ChemChina. It is these that produced the gasses for extermination for Hitler as also in the Vietnam war. Now they produce our seeds (genetic), fertilisers, pesticides etc which is the source of the bulk of modern-day diseases; they also prepare the cancer drugs.
Now let us take a brief look at the functioning of the economy today and what could be the likely impact from this collapse and a possible viable alternative.
- Lockdown & After
First let us take a look at the US, suspected to be the main source of the virus (together with China). Between March 18 and May 19, the total net worth of the 600-plus US billionaires jumped by $434 billion or 15 per cent, based on ATF’s (Americans for Tax Fairness) analysis of Forbes data. The top five US billionaires — Jeff Bezos, Bill Gates, Mark Zuckerberg, Warren Buffett and Oracle’s Larry Ellison — saw their wealth grow by a total of $75.5 billion, or 19 per cent. In March there were 614 billionaires on the Forbes list, and 630 two months later, including newcomer Kanye West at $1.3 billion. The billionaires’ worth rose from $2.948 trillion to $3.382 trillion in the period. “Together, the top five captured 21 per cent of the total wealth growth of all 600-plus billionaires in the last two months. The fortunes of Bezos and Zuckerberg together grew by nearly $60 billion, or 14 per cent of the $434 billion total,” said the report. Report by ATF and the Institute for Policy Studies Programme on Inequality. During that same approximate period, more than 38 million working Americans lost their jobs, nearly 1.5 million Americans fell ill with the virus and almost 90,000 died from it.
On the other hand, the working population has lost out terribly. 2.7 billion workers are now affected by full or partial lock down measures, representing around 81% of the world’s 3.3 billion workforce, and they are now facing a massive reduction in their income and employment. Any sort of measure we have had from the IMF, World Bank, OECD and the private forecasters are projecting anywhere around a 5% reduction in the global GDP this year which will be way more than the global recession of 2008. The state of the migrant population in India has never been so bad since British rule. Millions are destitute virtually being forced to beg for a morsel of food in cities/towns they have helped to build. But this is only the tip of the iceberg, others have lost their employment and large sections of the middle classes and self-employed have been pushed to a state of helplessness, lack of wherewithal and with psychological problems. The elderly are being harassed by police and society as though everyone is a corona suspect.
Also, as we have seen, even before the lockdown the world economies were heading for the worst crisis ever. This would anyhow have resulted in enormous hardships and led to the possibility of revolts all over the world. Also, the capitalist system would have been seen to be absolutely unviable for the majority. It would have appeared like the “End of History” for capitalism not as Fukuyama predicted for communism.
In the 1930s to deal with the starvation and hunger discontent there arose the fascist parties that massacred millions and tried to divert peoples’ discontent into anti-Semitism and use of divide and rule. As the situation is likely to be even worse this time the world rulers needed a reason to clamp down. What better than this pandemic……… what was basically a crisis of the capitalist system, will now be seen as a crisis caused by a pandemic. By creating mass hysteria and fear they have virtually got the entire populace under house arrest……. Unprecedented in history and defacto with social consent, with people themselves forcing it out of fear of the spread of the virus. In country after country the entire state has been handed over to the police who are the only ones allowed to roam freely (no covid for them) and rule the roost with an iron hand against anyone who even dare come out of their houses. Any permission, passes every action has to be with police consent not the health department. Also all central instructions are issued from the Home Ministry when it should have been the Ministry of Health that should have been in the forefront. In other words, everything is a police action, not a medical action. If the focus had been medical the focus may have been more on boosting immunity, which have been taken up by individuals and NGOs like Rajeev Bajaj (MD & CEO of Bajaj Auto), not the government
Now to get out of this economic crisis the governments worldwide have the standard two monetary tools: increasing debt by printing notes (quantative easing) and reducing interest rates drastically. But, these countries faced a dilemma; due to continuous stagnation in their economies they have already piled up huge amounts of debt and reduced interest rates to around zero and even negative. Having already done this when faced with such a such a severe crisis what was their way out? Ironically, they have no other mechanism than to adopt the same measures with governments like US, Japan and EU countries pumping in record amounts of money to bail out their economies and reducing, where possible, interest rates even further. This is a gigantic gamble as it may best act as a shock absorber, but precipitate an even bigger crash in the days to come.
Outputs in most sectors will fall by 25% or more according to the OECD, and the lock down will directly affect sectors amounting up to one third of GDP in the major economies. For each month of lock down, there will be a loss of 2% in annual GDP growth. This, in short could exceed any collapse in global output that we have seen in the last 150 years! Even worse than the Great Depression of the 1930s. IMF projects that over 170 countries would experience negative per capita income growth this year. This is how severe the situation is.
Millions of jobs have disappeared globally according to the ILO. The COVID-19 crisis is expected to wipe out 6.7% of working hours globally in the second quarter of 2020 — an equivalent of 195 million full time workers. The labour income loss is around 3.5 trillion dollars (maximum) in 2020. Hence, huge amounts of people are going to be pushed back into poverty. According to Oxfam, under the most serious scenario — a 20% contraction in income — the number of people living in extreme poverty would rise by 434 million to 932 million worldwide. The same scenario would see the number of people living below the US$ 5.50/day threshold rise by 548 million people to nearly 4 billion. Even at a more acute level, we are entering a real danger of millions of people just being hungry, starving to death, in a way that should not happen in the 21st century. In India we already see this happening on a huge scale.
As Michael Roberts points out (The Debt Dilemma) that rising global debt reduces the ability of capitalist economies to avoid slumps and find quick ways to recover.
In the current coronacrisis, the slump is accompanied by high global debt, both public, corporate and household. The Institute of International Finance, a trade body, estimates that global debt, both public and private, topped $255tn at the end of 2019. That is $87tn higher than at the onset of the 2008 crisis and it is undoubtedly going to be very much higher as a result of the pandemic. As Robert Armstrong of the Financial Times put it: “the pandemic poses especially big economic hazards to companies with highly leveraged balance sheets, a group that now includes much of the corporate world. Yet the only viable short-term solution is to borrow more, to survive until the crisis passes. The result: companies will hit the next crisis with even more precarious debt piles.” In the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47 per cent of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear. Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it, boosts earnings. But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.
Yet the entire developed countries already deep in a sovereign debt crisis, today utilise only the same mechanism of escape from the present crisis as they seem ton to have no other recourse; even knowing how disastrous it could be in the future.
In fact, since the mid-1980s, the U.S. economy has been swept up in a series of cycles, each cycle involving to some degree reckless borrowing and asset speculation leading to financial crisis, deflationary pressures, and prolonged economic weakness. In other words, rather than invest in productive assets, corporations switched to mergers and financial speculation so that much of their profits increasingly came from capital gains rather than profits from production.
So, we have the Oil Shock of 1973; the recession of 1982-83 which introduced the policies of liberalisation ala Regan/Thatcher; then the Dot com crash of 2001 and finally the Great Recession of 2008-09.
The deep slump of 1980-2 decimated manufacturing sectors in the global north and weakened labour unions for a generation. The basis was set for so-called neoliberal policies to try and raise the profitability of capital through a rise in the rate of exploitation. And it was the basis for a switch of capital out of productive sectors in the ’global north’ to the ’global south’ and into the fictitious capital of the financial sector. Ploughing profits and borrowed money into bonds and equities drove down interest rates and drove up capital gains and stock prices. Companies launched a never-ending programme of buying back their own shares and borrowings to boost stock prices to do so.
This set the basis for the massive financialization of the economy which has reached gigantic proportions today with the greater and greater concentration of money in the hands of just a few people. As Vandana Shiva said at Geneva on March 14 2019 that in March 2016 the 6 richest had $ 343 billion; a year later their wealth went up to $ 402 billion. And the bulk now of this wealth is organised by Asset Management Funds (AMFs) which were non-existent before liberalisation. The top AMFs in August 2019 controlled a wealth of $ 74 trillion (to put this in perspective, India’s entire GDP is about $ 2.5 trillion). Their major expansion took place post-2008/09. For example, the two biggest in the US/World, Blackstone and Vanguard, had a wealth of $ 1 trillion each in 2008. In 2019 Blackstone’s was $ 7 trillion and Vanguard’s was $ 5.6 trillion. UBS was $ 3.4 trillion. Most of these giants have their offices registered in tax havens and so pay little tax. In comparison, Goldman Sach’s total assets in 2019 was $ 1 trillion. The bulk of the wealth created by these AMFs is through capital appreciation not profit. So, while Blackstone had a gross profit of $ 7.4 billion in 2019, that of Goldman Sach’s was $ 34 billion.
While these conglomerates make huge wealth, profitability was extremely weak in manufacturing as we led up to this crisis, and it suggests that they were in no position to cope with a major collapse in the health systems and economies. In fact, if we look at total global corporate profits and not just the amount of profits per investment (i.e. profitability), we see that the total amount of profits had ground to a halt in the major economies as we entered the pandemic. As we have seen, the world economy was already about to enter a slump of some proportion but now of course the pandemic has worsened the slump.
A part of the problem to overcome the low profitability was that the companies were borrowing more, increasing their debt, taking loans from the bank and trying to keep going. This was particularly so for the smaller companies which had to take a lot of debt compared to the sales that they were making in order to keep moving. And that has increased the weight of burden on them. If anything should go wrong, they are left with huge amounts of debt. They have to pay and if they default, not only these companies will be in trouble but also the lenders. Even emerging markets have seen a dramatic increase in debts while growth has been slowing down.
Even in the present pandemic the bulk of the ‘stimulus’ is going to banks and financial instruments thereby sustaining the stock markets and the wealth of big business. The US Federal Reserve has intervened to inject colossal amounts of credit through buying up bonds and financial instruments so that banks and institutions can keep their heads above water. But will such medicines work this time, Jim Richards thinks not as demand will not increase. Ofcourse, to do this and alleviate part of the suffering of those displaced from employment, western governments, unlike India, have also put money into the accounts of those effected.
- Indian Lockdown and our Future
In India too, the situation has been precarious long before the lockdown. Though the government has stopped the publication of much official data to prevent the facts from coming out, the budget itself pictured the grim reality. In the budget it stated: In the financial year 2019-2020, Real GDP growth at 5% is the slowest since 2008-09 crisis. Manufacturing growth at 2% is the lowest in the last 13 years; the growth in investments was at less than 1%, the lowest in 15 years. Also, the rupee crashed to a historic low of Rs.76 to the dollar and expected to fall further. First it was the PSBs that were crumbling due to NPAs, now it has shifted to the Infrastructure financing bodies like IL&FS, then the Cooperative banks like Punjab & Maharashtra Cooperative Bank, and now even the private sector banks with the collapse of the huge Yes Bank. This has further spread to the mutual funds with the giant American Mutual fund Franklin Templeton having to shut six of its funds on April 23. This has never happened in India in the past. The investors’ money stuck in these funds is around Rs25,000crore, all from the middle classes. Newspapers predicted the disease could spread to other Mutual Funds. In addition, the equity market has dropped thus far between January beginning to end March by as much as 35 percent.
And now if we turn to the post-lockdown situation in India the Economist (May 22 2020) says: Goldman Sachs, expects the economy to contract by 45% this quarter (April to June 2020) at an annualised rate, and by 5% over the full year, assuming a big bounce in the second half. Indian exports crashed 35% in March and another 60% in April. India Today reported that fruits and vegetables are rotting as no transport or labour exists, either to pick it and even if picked to take it to the mandi. The Rs.15 lakh crore transport and logistic sector was paralysed after 24th with 1.5 million trucks stuck on the road (out of the 7.5 million) due to the suddenness of the announcement.
INDIA’S MANUFACTURING activity witnessed an unprecedented contraction in April as the lockdown led to a slump in demand and massive supply chain disruptions, according to the IHS Markit purchasing managers index (PMI) survey. At 27.4 in April, the seasonally adjusted HIS Markit India Manufacturing PMI fell from 51.8 in March. “The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over15 years ago. The decline in operating conditions was partially driven by an unprecedented contraction in output,” IHS Markit said. In March FACTORY OUTPUT contracted by a record 16.7 per cent.
TRANS UNION CIBIL has said loans worth Rs2,32,000crore of micro, small and medium enterprises are at a higher risk of becoming non-performing assets (NPAs). The NPA rate for MSMEs has increased continuously over the last few years to reach 12.6 per cent as of December2019, Cibil said in a report. “The amount of MSMEs falling in the highest risk bracket have outstanding credit balances of Rs2,32,000 crore, which is at a higher risk of going into NPA,”Cibil said.
No wonder the same ‘Economist” reported that: The National Council of Applied Economic Research, a think-tank in Delhi, predicts a contraction of 12.5% this fiscal year unless there is a huge stimulus. And as far as the ‘huge’ stimulus announced by Modi the Economist has this to say : But instead of a demand-side boost, and in particular urgent cash support for the poorest, what Mr Modi delivered was a hotchpotch of supply-side inducements and prods such as credit guarantees, along with reforms whose impact will only be felt in the medium term, at the earliest. Most of the stimulus was made up either of previously announced measures, or central bank moves to spur lending. Estimates of the actual new fiscal commitment by Mr Modi’s government range from a puny 0.7% of GDP to 1.3%, a far cry from the touted 10%.
Newspapers are comparing this with the Spanish Flu of 2018 brought into India by soldiers returning from the trenches of WWI (a reward of the British), which is ridiculous, as in that pandemic about 18 million Indians lost their lives but till date in the two months since the lockdown the official death count is just over 4,000 for the whole of the country. The cases are large at over one lakh but deaths are small. It is an established fact that the death rate is under 1% and most deaths take place because of other morbidities. In fact, the scare/panic was unnecessarily built up by the ICMR (Indian Council of Medical Research) as early as Feb 27th when by then there was hardly a single case. Using ‘mathematical models’ they predicted 1.5 million cases in Delhi and 5 lakh each in Mumbai, Kolkata and Bangalore. In a worst-case scenario, they predicted Delhi at 10 million cases and Mumbai at 4 million, with the peak occurring by end March itself. Compare these figures with the total cases all over India reported till May 24th at 1,32,000. There is literally no comparison with the ICMR predictions; that too by the top medical body in the country. But neither the newspapers nor the ICMR will apologise to the public for spreading fear and panic. And probably the govt acted in panic seeing these ICMR predictions on March 24th night.
A 12% contraction of the Indian economy is unheard of and the pain pushed on to the migrants and middle classes, is only the start of what is to come. Of course, while we are all locked up and millions starving, Reliance has been signing four mega deals (no lockdown for him) and his stocks have reached an all-time high, rising 45%. Anil Agarwal of Vedanta utilised the fall in value of shares to buy back the entire public shares buying 49% of the shares at throwaway prices and delisting from the stock exchange. Besides, internet companies and e-commerce have been doing a roaring business with Amazon’s, Walmart, Google’s, etc stocks reaching peak levels in the US stock exchange. And this, in a scenario when the general stock indexes have fallen drastically in both India and the US.
The Indian economy being so dependent on the west is being severely impacted by this crisis as we have already seen. Already here the top 1% own more than 50% of the India’s personal wealth, and the top 10% hold almost 80%. The number of people living in slums is over 100 million which is way more compared to other countries in South and Southeast Asia. It is this population that is particularly at risk with any virus as it is not possible to do social distancing in these slums or for that matter in the one-room tenements in which most live. In Mumbai we see that most of the Corona cases are in the slums. According to Picketty India’s inequality has risen fastest in the world. The share of the top decile in total income increased from 33% in 1980 to 55% in 2018 in India; while in Europe it increased from 28% to 34%, in Russia from 26% to 45%, in US from 35% to 48% and in China from 26% to 41%. Besides, this does not take into account “the unparalleled abuse of untouchability (Toyananbee) making India the most unequal, the most shameful, the most heartless, and the most toxic country in the world”.
With such a scenario, worst is yet to come and not just from the virus, but economically and politically. As with the Great Depression hunger and starvation was accompanied by fascist and communal terror. Millions were killed and even more died of the pangs of hunger. The writing is already on the wall worldwide and already in an extreme form in India. Already newspapers are reporting MSMEs are likely to default on their loans as also in housing and other places. That puts enormous pressure on the Banks and there could be a run on the banks with people losing confidence in maintaining their deposits. Other saving schemes are already under pressure like the mutual funds. With these collapsing the hard-earned savings of people are likely to dry up. The crisis will hit not only the migrant labour and self-employed but also the middle classes. With the economic insecurity increasing tenfold, the entertainment opportunities crumbling with social interaction becoming more difficult and suspect the psychological cases are likely to shoot up and even the level of suicides may not be confined to just the farmers but spread to the middle classes, who have seen better days recently, all vanishing. The crisis here will probably be worse than the West because of the fragility of the economy and the already horrifying poverty-levels.
On the other hand, the domination of big capital and the few families in the West and their counterparts in India will increase tenfold and the nexus between them and the political class will only tighten. They will rule with an iron hand and the ‘fear’ of the virus can keep people locked up indefinitely with only those with government/police passes allowed to move around. Already the Arogya Setu-type Apps is said to be such a pass which is being made compulsory for any form of travel, and that too even before any opening up. ‘Non-essential’ travel can be confined indefinitely and what is essential or not will be decided by the government/police. With technology, Big Brother will be watching you 24 hours of the day.
This is the likelihood with varying degrees of difference worldwide in the near future and not the idyllic possibilities pictured by some. A 1984-type scenario with George Orwell laughing from his grave. As long as the financial power remains in the hands to a few and political power interwoven with it, things can only go from bad to worse —– whether in the sphere of pandemics or economically.
No doubt this economic structure is not viable and is likely to go from crisis to crisis but it will not fall on its own. Besides, it needs an economic and political alternative that is able to assert itself.
This alternative could be one that would be linked to the destruction of super-big finance/speculative capital together with that of the handful of big houses, and the emergence of an eco-friendly, cooperative based economy, where technology is used for protecting (not harming) the environment and human and animal race. A true swadeshi alternative.
Politically, with the destruction of the power of the handful of world elites/billionaires and their political stooges, a genuine democratic alternative needs to be built block-by-block to sustain and evolve the new economic model. The goal of the alternative should be happiness for the majority achieved through economic security, social equality, democracy and freedom from the grass-roots, and the values of love, harmony and cooperation against all forms of hatred, alienation, domination and one-upmanship in all spheres of life.
But this is in the long-term, in the short-term people will have to protect their interests and survive by banding together in a spirit of cooperation to protect themselves, their hard-earned savings and resisting the evil-doers. Afterall the European rulers have a history of genocides —– wiping out the entire indigenous populations of the Americas, the mining interests killing upto 40 million in Africa, two world wars and mass genocide by bombings in Hiroshima, Nagasaki, Indo-china and then the Middle-East; and the death of roughly 30 million in the two centuries of British rule in India. Anything is possible in the coming period of intense crisis.
The super-rich have already protected themselves by parking their money in tax havens; the middle-classes and poor need to act before it is too late. The Great Depression lasted 10 years and ended with world war II………where will the current one end?