Another “Reform” Fraud from Chidambaram


Analytical Monthly Review, published in Kharagpur, West Bengal, India, is a sister edition of Monthly Review.  Its April 2007 issue features the following editorial. — Ed.

The “reform” offensive that started in 1991 as New Economic Policy has continued 15 years with different cover stories — as “recovery from BOP crisis” or “shining India” or “industrialization” — and still goes on, but not without increasing resistance from those who are direct sufferers of the policy all over India.  As a result, new “reform” initiatives are increasingly disguised and obscured.  A favorite has become manipulation of the financial sector by the native ruling classes and imperialists.  Chidambaram & Co are confident that the issues are too remote from daily life and too complex to become areas of resistance.  Part of the recent budget speech of the Finance Minister is an example:

“Innovative Financing for Infrastructure

95. The minimum obligation of States to borrow from the National Small Savings Fund (NSSF) has been brought down to 80 per cent of net collections.  Repayments of past NSSF loans by the Central and State Governments have also commenced from 2005-06, making available resources for long-term lending.  I therefore propose that these funds may also be borrowed from NSSF by India Infrastructure Finance Company Limited (IIFCL).

96. An initiative that has borne fruit is the launch of the US$5 billion infrastructure financing initiative by Citigroup, Blackstone, IDFC and IIFCL.

97. A committee chaired by Shri Deepak Parekh has made a number of recommendations for financing infrastructure.  One of the recommendations is to use a small part of the foreign exchange reserves without the risk of monetary expansion.  The Committee has suggested the establishment of two wholly-owned overseas subsidiaries of IIFCL with the following objectives:

(i) to borrow funds from the RBI [Reserve Bank of India] and lend to Indian companies implementing infrastructure projects in India, or to co-finance their ECBs [external commercial borrowings] for such projects, solely for capital expenditure outside India; and

(ii) to borrow funds from the RBI, invest such funds in highly rated collateral securities, and provide “credit wrap” insurance to infrastructure projects in India for raising resources in international markets.

The loans by RBI to these two subsidiary companies will be guaranteed by the Government of India and the RBI will be assured of a return higher than the average rate of return on its incremental investment.  Government proposes to examine the legal and regulatory aspects of the recommendation, in consultation with RBI, in order to find an innovative method of enhancing the financial resources for infrastructure.”

The essence of the scheme is the creation of a risk-free environment for private speculation — both for Indian and global imperialist capital — transferring risk, but no say in the process of the supposed “investment in infrastructure,” to the only remotely democratic participant in the process, the Government of India.

Next to (frequently spurious) claims of increases in growth rates, the most frequent claim for the supposed success of “reforms” has been the increase in foreign exchange (“forex”) reserves.  This claim is belied by a corresponding trend in the first years of the 21st century all over the world.  Massive increases have taken place in the forex reserves of many states, most spectacularly China, as ever far outpacing India.  Argentina, bankrupted by neoliberal policies as of 2001, has posted enormous increases in forex reserves once the neoliberal regime was rejected.  Cuba, with a planned economy and subject to a U.S. embargo, now has forex reserves on a per capita basis nearly twice that of India, where it had lagged India as recently as 2004.  In short, India’s improved forex reserve position is first and foremost a result of the global liquidity created by the vast U.S. current account deficits.

Nonetheless, some increases in forex reserves are more stable than others.  In the Indian case, in addition to external commercial borrowings (“ECBs”) by Indian firms, remittances and NRI deposits, foreign investment has made a substantial contribution — but primarily portfolio or foreign institutional investment (FII), not direct investment (FDI).  The most stable source, a surplus in the balance of trade in goods and services, has not contributed at all — unlike the Russian, Argentine, or Chinese cases.  Since 1991 the Indian current account has been positive only in 2002-3 and the following year, and such gains as were made in those years have been wiped out since.  Both NRI deposits and FII inflows, which together far outweigh the relatively durable FDI, are inherently unstable and many possible changes in international capital markets — dominated by actors that exclude India — could quickly reduce or reverse the flow.  Not only are FDI inflows far below foreign portfolio investment in India, but also are exceeded two-to-one by direct investments abroad by Indians.

Neoliberal ideologues continue to argue that weak FDI is due to insufficient “reforms.”  This is nonsense.  Countries that adopted full neoliberal capital market “reforms” such as Argentina and South Africa experienced, instead, devastating disinvestment.  In the face of global overcapacity in monopolized manufactured commodities from automobiles to semiconductors, FDI almost as much as FII looks to the speculative quick return.  Favored areas for FDI are therefore abusive raw material extraction — such as the Phulbari strip-mining scheme in Bangladesh — or SEZ real estate giveaways.  FDI in infrastructure, by definition requiring a long perspective, is unavailable.

Now in principle there is nothing wrong in the state utilizing its resources to build the infrastructure that FDI shall never provide, indeed that is exactly the achievement of the Chinese revolution that made possible the current growth that has amazed the world.  And, predictably, utilizing state resources — even when prostituted for private speculation — distresses the market fundamentalist ideologues who dominate the Indian business press (see, for example, Ashoak Upadhyay, “Foreign Exchange Reserves — Is the Glass Half Full or Half Empty?”  The Hindu Business Line, March 9, 2007).  Yet we hope that Marxist observers will not be misled by the “investment in infrastructure” sugar coating of what is, at base, a vicious proposal.

In the proposed plan, a new for-profit company dominated by U.S. entities Citigroup and Blackstone shall invest forex borrowed from the RBI in bonds that yield more than U.S. treasury bills, the RBI’s current forex investment vehicle.  The company will then sell, backed by these assets, a “credit wrap” — insurance against default — to private Indian corporations, lowering the cost of loans raised overseas to fund infrastructure projects.  The motor of the entire project is a Government of India guarantee to the RBI.  The value of this sovereign guarantee is then distributed in part at each level of the structure: the RBI receives for forex lent to the new company more than it now receives from U.S. treasury bills, the new company receives the difference between what it pays the RBI and what it receives on the higher-yielding (and therefore more speculative) bonds and also gets a fee for its (ultimately the Government of India’s) guarantee against default, and the Indian capitalists receive external loans at lower cost, or even external loans they would never have otherwise received.

Despite the unnecessary complexity, this is no more than a seizure of public property for private speculation.  The Government of India guarantee, were it to be directly given to loans for infrastructure projects, would be of necessity accompanied by public determination of which loans would so qualify and by provision of criminal sanctions against fraud.  Instead, a new company dominated by the U.S. lords of finance capital — who risk only a minimal investment of less than five percent of the forex to be received — shall get RBI assets with which to speculate in higher yielding bonds, in most of which they shall no doubt themselves for enormous fees play the role of dealer or issuer, and then obtain further massive fees for providing “credit-wrap” insurance.  Citigroup and Blackstone will get their entire investment back very fast, but collect right up to the day the whole scheme falls apart.  And Indian capitalists, who prefer risky investment in aging Luxembourg steel mills to creating new industry in India, will now get foreign capital cheaply for newly created entities purportedly dedicated to investment in what they choose to decide shall be the “infrastructure” needed in India.  One can be certain that all foreign technology or equipment purchased with these ultimately public funds shall be burdened with enormous extra costs pocketed by swarms of supposed intermediaries, parasites and speculators at every step.

At the end of the day there will be the inevitable bankruptcies and defaults followed by the assumption by the Government of India of debt equal to the looted forex reserves.  Perhaps it will be argued that we are painting too dark a picture, but we have a memory that goes back more than a day or two.  What we have in mind is an earlier instance of private corporate participation in infrastructure development, one of the first triumphs of the neoliberal “reforms,” the Dabhol Power Corporation fraud.  Enlisted on behalf of speculative profits for the U.S. Enron Corporation were the Industrial Development Bank of India (IDBI) who took the lead in the financing of the project, and government guarantees — from the Maharashtra State Electricity Board — played as some may recall a crucial role in getting the scheme off the ground.  Certainly among those who do remember this case are some people at Blackstone, once Enron’s principal financial advisor.  Even more certain to recall Dabhol are Citigroup executives who no doubt closely studied the entire Enron case before signing off on the agreement topay $120 million to settle U.S. Securities and Exchange Commission allegations that Citigroup helped Enron commit fraud. And surely there will be some who recall that Enron was a leader in developing insurance against bankruptcy, the primary vehicle by which Citigroup and Blackstone lay claim to speculate with the forex reserves of the Reserve Bank of India.

Chidambaram & Co now peddle a new scheme but the same old fraud.  If public resources are to be expended on infrastructure, and they should be, public authorities ought to make the crucial planning decisions and be responsible for the consequences.

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