Continuous interest rate cut and liquidity infusion cannot resolve but worsen ‘stagflation’ in capitalist economy


Bourgeois economists are in dire straits. They have been circulating various theories to provide a plausible explanation of why the capitalist economy round the world is sunk in an insurmountable crisis triggered by sustained shrinkage of market. Earlier, in the parlance of bourgeois economics, certain terms were coined to denote specific features of the economy. Also were provided various theories to link those terms to indicate the state of the economy at various points of time. For example, the term stagnation is defined as a condition of slow or flat growth in an economy when real economic growth (an inflation-adjusted measure that reflects the value of all goods and services, i.e. GDP produced by an economy in a given year expressed in base-year prices) is less than 2% annually coupled with high unemployment and involuntary part-time employment or underemployment. It is also called recession as people lose buying power to acquire goods which are then either stockpiled or not produced at all. On the other hand, inflation is described as the decline of purchasing power of a given currency over time, (meaning if Rs 20 was spent earlier to buy 1 kg of rice, one has to pay now Rs 40 to buy same quantity of rice) or broadly rise in the general level of prices. Most commonly used inflation indices are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
Normal conditions described in textbooks of bourgeois economics
In a fast-growing economy, employment ought to be high and incomes go up quickly. So, more and more people have the money to buy the existing bunch of goods. As more and more money chases the existing set of goods, prices of such goods rise. In other words, inflation spikes. When growth contracts or growth rate decelerates, then typically, people’s incomes also get hit because they lose jobs and unemployment soars. As a result, less and less money chases the same quantity of goods. This results in either the inflation rate decelerating (that is, prices grow at 1% instead of 5%; also called “disinflation”) or it actually contracts (also called “deflation”; that is, prices reduce by 1% instead of growing at 5%). Inflation, as stated in any textbook of bourgeois economics, can be either demand-pull (meaning more demand but less supply) or cost-push (when cost of production is high and hence the additional cost is loaded on the price). There is another general notion. If the price of a commodity falls, the quantity demanded of it will rise. On the other hand, if price of a commodity rises, its demand will dip.
That means inflation should rise when the economy is growing fast. It is because people are earning more and more money and are capable of paying higher prices for the same quantity of goods. But, when the economy stalls, inflation tends to decline as well because there is less money now chasing the same quantity of goods, as mentioned.
Phenomenon of stagflation in dying capitalism
But these theories failed to describe how it is that inflation is found to be rising when economy is in stagnation-a phenomenon which marks present day capitalism thrashing in its death throes following inexorable course of history. So, the economists belonging to the bourgeois camp began to wrack their heads and then created a new terminology-stagflation, a combination or portmanteau of stagnant growth and rising inflation.Iain Macleod, a Conservative Party MP in United Kingdom, while speaking on the UK economy in the House of Commons in November 1965 stated: “We now have the worst of both worlds-not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation. And history, in modern terms, is indeed being made.” Later, Paul Samuelson, an American economist, won the Nobel Prize for explaining the simultaneously and concomitant rise of inflation and unemployment rates in the US during 1970s and 80s, meaning stagflation. But the point is: what is the genesis of stagflation? Is it a natural phenomenon or a situation created by the very laws of capitalist economy based on the objective of maximizing profit by constantly squeezing the common toiling masses and thereby plummeting market demand? This question, of course, has been conveniently parried by all the votaries of bourgeois economics. They, instead, remained content to find a bunch of jargons and spurious mathematics that could create a kind of justification in favour of stagflation. Right now, if one looks at the capitalist-imperialist world, one would find stagflation to be a common feature-growing recession, mounting unemployment and spurt in inflation.
Let us go into it a bit more. What economists-columnists subservient to ruling capitalism shrewdly seek to hide is that in capitalist economic law, the entire production system is run from the standpoint of the interest of the capital or capitalists. Maximization of profit and not meeting the needs of the society is the motive of production. And this maximum profit accrues in the hands of the few owners of the means of production (industry or land) i.e. the capitalists or the bourgeoisie only by ruthlessly exploiting the working people, denying them their legitimate due and squeezing out even the last drop of their blood. Profit is accrued by way of appropriation of surplus labour power of the workers or, in other words, appropriating the value of unpaid labour (which is at the root of capitalist market crisis as it robs the toiling people of purchasing power.) Wealth accumulates only from this profit. Globalization, free market economy or trickle-down economics, whatever renaming takes place -capitalism remains capitalism. So remain operative its basic operative laws. And the more obsolete, reactionary capitalism seeks to prolong its moribund existence, the more it breeds crisis. Stagflation is a manifestation of that insolvable crisis endemic of the capitalist system.
India – a typical case study
If we turn to India, we shall find the economy has long been gasping in a stagflationary condition. But the governments subservient to the ruling monopolists never accept it. In December 2019, the BJP Finance Minister Nirmala Sitharaman refused to comment on queries on stagflation. According to reports, she said: “I have heard of the narrative going on and I have no comments to make”. But the monetary policies adopted by the Reserve Bank of India (RBI) confirm that despite all liberal measures to reach out maximum concessions and benefits to the ruling monopolists, the economy has been plunging more and more into stagflation.
We need to dwell a bit on the monetary policies and the tools and techniques used in bourgeois economics to get an insight into stagflation. The RBI announces its monetary policy bimonthly now. The monetary policy is related to the monetary matters of the country. The policy involves measures taken to regulate the supply of money, availability and cost of credit (i.e. borrowing and lending rates of interest from banks and financial institutions) in the economy. Of the various tools and techniques available for such controls are Cash Reserve Ratios (CRR which is the cash set aside by the commercial banks with the RBI) and Statutory Liquidity ratio (SLR which is the portion of the liquid assets (i.e. assets that can be easily converted into encashed like Government securities etc.)set aside by the commercial banks with the RBI). If CRR is reduced, banks have surplus cash in hand for lending. Similarly, by reducing SLR, the RBI can increase liquidity (meaning how quickly one can get one’s hands on one’s cash reserve or convert one’s assets into cash) with the commercial banks. The additional money available because of increased liquidity might then be offered as loans to creditors (like the industrial houses, small scale industries, individuals seeking housing or consumer loans etc). Similarly there are two other rates known as Repo rate and Reverse Repo rate. Repo rate is the rate at which banks borrow from RBI on a short-term basis against a repurchase agreement while reverse of repo rate is the rate RBI pays to banks in order to keep additional funds with it. If Repo rate is lowered, banks can borrow additional fund at a cheaper rate for lending. Similarly, lowering of Reverse repo rate means discouraging the banks to park funds with the RBI and instead find avenues for lending at a higher rate.
Indian economy in tatters despite RBI lowering interest rates
Now, of late, it was being found that the RBI stopped lowering all these rates arguing that this step would boost liquidity. The liquidity measures so announced by the RBI since February 2020 aggregated to about Rs 9.57 lakh crore – equivalent to about 4.7% of the 2019-20 nominal GDP (Nominal GDP differs from real GDP in that it includes changes in prices due to inflation). The RBI claimed the liquidity measures so far have helped in significant lowering of interest costs for corporate borrowers and others resulting in improvement in their financial conditions to boost the economy by investing more and more in production. But suddenly, the RBI had decided to keep the rates related to monetary policy unchanged for the fourth time in a row in the monetary policy announced on 4 February 2021. Why? Because the RBI was of the view that inflation was likely to remain elevated and the substantial wedge between wholesale prices and retail prices would force the consumers to turn away even from purchasing essential items. Here one more point needs to be discussed. A lowered bank rate entails a slash in the interest rate on bank deposits. Bourgeois economists argue that in such a situation, people would be disincentivized to save and instead come to the market to buy more. This would increase demand and so supplies would also increase in tandem. But this is a bunkum. Who does not know that majority of the countrymen do not earn even what is needed for bare subsistence, let alone saving. Even the middle class who are relatively better-off are haunted by the fear of uncertainty of life and hence try to save as much as possible even if the return comes down. So, the presumption of the bourgeois economists is a misnomer.
Coming back to the holding on to the bank rates by the RBI, it is evident that the apex bank had opted not to disclose that despite all these so called liquidity support, neither has the productive investment gone up nor has the plummeting of buying power of the common people abated. While there is a cunning effort to hold Covid 19-induced lockdown responsible for all the mess, truth is otherwise. Long before the strike of the pandemic, the Indian economy was in shambles. According to National Statistical Office (NSO), the Consumer Food Price Index increased from 5.11% in September 2019 to 7.89% in October 2019. The retail price inflation rate reached an annual high at 4.62%. By the end of the 2019-2020, inflation was 6.7%. The NSO estimates of GDP (calculated as per revised method that inflated growth of 2012-14 from 4.7 to 6.9) for the second quarter of 2019-20 was 4.5%, the lowest in a decade. GDP growth fell continuously for eight quarters. For the April-June 2019 period, the Index of Industrial Production (IIP) had slipped 7% lower compared to corresponding period in the previous fiscal year. All major industries were in a slump. Officially, 6.8 lakh industries were reported to have closed by this time. India’s unemployment rate long before the coronavirus pandemic struck was highest in 45 years. Closure of industries and fall of production in core sectors has left lakhs of workers jobless. Earlier, demonetization had gobbled up thousands of jobs in cash-based industries especially in the unorganized and small-trade sectors as well as agriculture. According to a Consumer Pyramids Household Survey by the Centre for the Monitoring of the Indian Economy (CMIE), nearly 20 lakh jobs were lost between January and August 2017 because of demonetization. The actual figure would be much more than what had been reported. The cascading impact of job loss at such magnitude also dealt a blow to other means of livelihood. Besides, many small and medium-scale companies had been forced to lay off lakhs of employees to reduce production costs and volume. Contraction in manufacturing, capital goods and mining hit factory output and Index of industrial Production (IIP) hit record low in 2019. As per National Sample Survey Office (NSSO) report, per capita consumption in real terms, or at constant prices, had fallen drastically between 2011-12 and 2017-18. That means people were consuming much less and hence spending figures declined. Credit growth rate of Indian banks, for the first time this fiscal, slowed to single digit at 8.8 per cent to Rs 97.71 lakh crore during the fortnight to 27 September 2019 meaning there was hardly any inclination on the part of the industries to take loan because of continuous contraction of market. The RBI claimed that as much as Rs 5.2 lakh crore had been released by it to the banks by way of bringing down the borrowing rates. But there have hardly been any borrower from the banks. Who would risk borrowing when the economy is in deep recession and demand is dipping with every passing day as people are losing purchasing power in absence of means of earning? So the commercial banks were left with no option but to park all of that money back in the RBI even at lower reverse repo rate. As a result quantum of money in the RBI’s reverse repo rate parked by the commercial banks with the RBI swelled from Rs 3 lakh crore on 27 March to Rs 8.4 lakh crore by the end of April.On the contrary, NPAs i.e. defaulted loans majorly by the large corporates, are multiplying. As of 31 March 2019, India’s scheduled commercial banks had gross NPAs worth Rs 9.49 lakh crore. “The economic impact of the pandemic… may result in higher NPAs and capital erosion of banks”, admitted the RBI governor. It is apprehended that NPAs could rise to as high as 14.7% of total loans in the worst-case scenario by March 2021.
Surely, the pandemic has further worsened the situation because sudden unplanned imposition of lockdown and the government refusing to give any relief to the suffering people, nor taking any remedial measure to salvage the economy sunk in deep crisis in pre-pandemic situation. So, infusion of as high as over Rs 12 lakh crore of liquidity by the RBI through substantial interest rate cuts of over 250 basis points over the last 24 months has been of no avail.
The monopoly giants reaped all benefits
Though continuous interest rate cut and the liquidity infusion could neither contain or reduce inflation nor boost the economy but it has benefitted the giant monopoly houses in all respects. Lowered lending rate or cost of borrowing has enabled the big borrowers to get bank loans at nominal interest. In absence of scope for productive investment in key and essential sectors, monopoly houses found this as an easy window to use cheap bank finance for investing in speculative capital market, gold, real estate and in the opened up public welfare sectors like health, education etc. So whatever little credit offtake has taken place has been for such purposes only so that the corporate sharks can multiply their wealth. Oxfam had earlier reported that just 1% of the super-rich owns 73% of country’s wealth. Now Oxfam in a latest report has given a detailed account of how the wealth of the top monopolists swelled during the pandemic while common Indians were struggling to eke out a bare living. Not only that. These monopolists have been under no obligation whatsoever to refund bank loans as the government has been too generous to liberally waive their defaulted loans, by either directing the banks to write off the loans straightaway or under the garb of restructuring. It is reported that loans worth Rs 8 lakh crore have been written off by Indian banks in the last decade. And then the government is rescuing the banks through recapitalization, meaning providing them financial support from public exchequer. Also the government lost revenue of as high as Rs 1.43 lakh crore in just one year in 2019 by drastic cut in corporate tax.
Common people bearing the brunt
And who is bearing the brunt? Surely the common pauperized people. Lowered bank rates are translating into lower interest on bank deposits by common savers. So, their return from hard-earned savings is depleting, thus affecting their spending power. Recently, the government announced with much fanfare a Rs 20 trillion rescue package to revive the economy in the post-lockdown period. But the bulk of this economic stimulus, which is nothing but more liberal grants, has also been grabbed by the monopolists-corporate. All the measures that the government and RBI had taken have brought gains for the capitalists at the cost of distress, pain, sufferings of the working class. While benevolence has been showered on the corporates, the government mopped up as high as Rs 1.96 crore in the last one year and a half by imposing additional excise duty on petrol-diesel-LPG. This hefty hike in fuel prices are also contributing to spiralling of price line or, in other words, fuelling inflation. It is obvious that the government has also been printing currency notes to finance budget deficits which is causing spurt in money supply and thereby increasing inflation. Huge black money pumped into the system regularly is also another factor of rising inflation. Moreover, giving licence to the hoarders, blackmarketers and punters to manipulate price is also adding to inflation. The very theory of the RBI or the government that discouraging savings by lowering bank interest and returns from national saving schemes is prompting people to spend more and thereby causing demand-pull inflation is thus proved to be far from the truth. In this way, the RBI and the government have been seeking to pass on the entire burden of the capitalist crisis on the common people including the working class and peasantry in the form of various stifling economic and fiscal policies while the profit interest of the monopoly houses and corporate sector are being catered to in every possible way. And as the purchasing power is dwindling, market is getting shrunk resulting in recession which in its wake is causing further job loss and stagnating the economy more and more. This is the genesis of stagflation. The recent claim that since India’s GDP has grown at 0.4% on a year-on-year basis in the quarter ending December 2020, the country is out of recession is a bunkum as this is hardly any evidence of economic stagnation being over.
And as we have pointed out earlier, stagflation is a feature of dying capitalism stricken in insolvable market crisis. 175 year back, great Marx and Engels mentioned in the “Communist Manifesto’ that “It is enough to mention the commercial crises …put on its trial, each time more threateningly, the existence of the entire bourgeois society… And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises…” They had conclusively proved that the capitalist economic system is inherently crisis-prone because it is driven by forces which cause it to be unstable, anarchic and self-destructive. Elucidating further, great Lenin had shown that economic ruin, crisis, …is what the capitalists have brought all the nations to …(and) there is no way out-except through the transfer of power to the revolutionary class, to the revolutionary proletariat, which alone… (would be)) leading humanity to lasting peace and liberation from the yoke of capitalism.” (“Honest defencism reveals itself”, CW Vol 24, page 205 – 206) .In fact, Soviet socialism had proved it. When the entire imperialist-capitalist world was gasping in acute crisis and plunged int great depression the early 1930s, Soviet Union within a less than two decades from accomplishing revolution and establishing socialism, not only faced any crisis but surpassed all imperialist countries in every aspect of economic development and elevated standard of life of the common people. There was no unemployment, no recession, no price rise, no closure, no lay-off-nothing. It is thus clear that so long capitalism would persist, stagflation and such other aberrations would continue to surface and plague people’s life. Till the time capitalism is overthrown by revolution, toiling millions need to build up united struggle to force government and the RBI reverse their anti-people, pro-capitalist monetary and fiscal policies.
[Information sources:
The Wire-16-05-19, 23-09-19, 23-12-19, Outlook 24-11-19, 12-10-19, Economic Times 16-11-19, Live mint-19-11-19, 29-10-2020, The Hindu 19-01-20, Business World- 14-12-19, Indian Express 19-12-19, 07-08-20,10-08-20, 07-12-20, lendingratesambadenglish 08-01-20, Hindustan Times 14-01-20, 27-02-21, Business Insider 22-05-20, Bloomberg/quint 25-09-20, Business Today, 18-10-20, The Print 07-01-21,,, money control31-12-20]

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