Speculation, Tariff Threat and the Working People
Prabhat Patnaik
THE fact that speculation can exacerbate a basic situation of shortage of a commodity by encouraging its hoarding, or even cause a completely artificial shortage of it when no basic shortage exists, and thereby play havoc with the lives of the working people, especially when the commodity happens to be a necessity, has been well-known. There is no doubt for instance that the basic situation of excess demand in the foodgrain market, owing to deficit-financed war expenditure on India’s eastern front, that caused the death of 3 million people in the Bengal famine of 1943, was exacerbated by the hoarding of grains. But the neo-liberal regime of today does something more: it makes the cost of living of the working people directly dependent not just on speculative behaviour in commodity markets, but on speculative behaviour in the currency market as well.
With controls on capital flows, including financial flows, lifted under a neoliberal regime, and with the exchange rate being determined in the market, any tendency on the part of speculators to take funds out of the country in the form of, say, US dollars, causes an exchange rate depreciation, which raises the price of imports in local currency. When these imports include essential inputs like oil, this has a cost-push effect on the economy as a whole, which causes an inflation that necessarily leads to a fall in real wages, or more generally on the real incomes of the working people. Indeed such a cost-push inflation, in a world where profit mark-ups are given, can only come to an end through a compression of the real incomes of the working people; this squeeze on real incomes occurs by virtue of the fact that their money incomes are not indexed to prices. The hallmark of a neo-liberal regime therefore is that the real living conditions of millions of working people are left to the whims and caprices of a bunch of international speculators.
It may be thought that just as any tendency towards a financial outflow causes a squeeze on the living conditions of the working people via an exchange rate depreciation, any opposite tendency, towards an inflow of finance (in excess of the autonomously determined current account deficit in any period) should have the opposite effect of appreciating the exchange rate and hence lowering the cost of living, to the benefit of the working masses. This however does not occur; there is an asymmetry between the effects of a financial inflow and those of a financial outflow. When finance flows in, if the exchange rate is allowed to appreciate, then domestic production becomes uncompetitive vis-à-vis imports; production contracts while imports increase, and the increase in imports would, in the absence of any intervention by the central bank, have to be large enough to absorb the extra financial inflow. In such a case, the country would have become indebted to foreigners in order to finance its own “de-industrialisation”, which would have been a patently absurd development. To avoid such an absurdity, the central bank in the third world country intervenes to prevent the exchange rate from appreciating, by holding on to the extra financial inflows in the form of foreign exchange reserves; this is what the Reserve Bank of India has been doing.
The asymmetry between financial inflows and financial outflows therefore lies in this: while outflows cause the exchange rate to depreciate and hence the real incomes of the working people to be squeezed through cost-push inflation, inflows are simply held as additional reserves without any effect on the exchange rate. True, the holding of such reserves serves as a cushion against financial outflows, so that when such outflows occur, reserves are decumulated to prevent a depreciation of the exchange rate. But since the decumulation of reserves serves to strengthen expectations of a depreciation of the exchange rate and hence causes a further outflow of finance, the central bank typically does not wish to run out of reserves; it does not completely prevent an exchange rate depreciation. There is some depreciation and some decumulation of reserves, resulting on the whole in a squeeze on the real incomes of the working people, as has been happening in India in recent months.
The basic asymmetry, and hence the validity of the basic proposition, therefore remains unimpaired, namely, that financial outflows cause the exchange rate to depreciate and hence squeeze the real incomes of the working people, while financial inflows are simply held as reserves at the prevailing exchange rate without any opposite effects. This asymmetry shows itself over a period of time as a secular decline in the exchange rate, which is exactly what we have been witnessing in India under the neo-liberal regime. On November 10, 1990, when the Chandrasekhar government had taken office just prior to economic “liberalisation”, the exchange rate was 17.50 rupees against one US dollar. Today, November 15, 2025, the exchange rate is 88.50 rupees against one US dollar; a huge depreciation of the rupee during the neo-liberal period. The extent of this depreciation, by over 400 per cent, is in contrast to a mere 33.3 per cent depreciation over the entire preceding period, from independence in 1947 to 1990.
All this relates to the immanent tendency of a neo-liberal capitalist economy in the third world. There is however a second way in which a third world economy becomes vulnerable to import-cost-push inflation within a neo-liberal arrangement, and that is evident today in the face of Trump’s tariff aggression. Trump is imposing punitive tariffs against India on the grounds that India is violating the unilateral sanctions imposed by the US and other imperialist countries against Russia by buying Russian oil. Since India’s achievement of self-reliance has been undermined by the adoption of a neo-liberal regime, and since the Modi government does not wish to reverse neo-liberal policies and also lacks the backbone to take any counter-measures against the U.S., it has totally caved in to American pressure and agreed to stop buying Russian oil. This is not admitted by the Indian government, but Trump has announced it in no uncertain terms, and there is no reason to disbelieve him.
India’s ceasing to buy Russian oil will push up oil prices within the country for two distinct reasons. The first is that Russian oil is cheaper than the oil that will be substituted for it, so that not buying from Russia will push up India’s oil price even at the prevailing international oil prices. The second has to do with the fact if Russia is cut off from supplying oil, then the international oil price itself will go up, for it will mean a lower overall supply relative to demand in the world economy; this will further increase oil prices within India.
A rise in oil price within the country will have a cost-push effect on the economy which will come to an end only through a compression of the real incomes of the working people. India’s succumbing to American pressure by ceasing to buy Russian oil therefore will have exactly the same effect on oil prices as an exchange rate depreciation; and it will squeeze the incomes of working people of the country in an exactly analogous manner.
US sanctions against Russia are imposed not just for political strategic reasons but also for increasing the size of the market for the more expensive American oil. Europe has already fallen in line, and committed what can only be described as economic hara-kiri, by substituting more expensive American energy for cheaper Russian energy: Germany is well on its way to becoming deindustrialized by such substitution, and German workers have already suffered the rigours of one cold winter. Now the working people in third world countries like India are also being made to suffer in order to enlarge America’s energy market.
It speaks volumes on America’s imperialist arrogance that it openly demands sacrifices from the working people all over the world in order to promote its own economic interests by enlarging the size of its energy market. It also speaks volumes on the current Indian government’s total helplessness when faced with American imperialism’s arm-twisting: this government is willing to sacrifice the interests of the Indian working people for the sake of placating an American administration that is promoting American interests.
