The BJP-led government has just got parliament to pass a legislation permitting up to 100 percent foreign equity-ownership in India’s insurance sector. This, the Prime Minister has announced, marks the beginning of a major “reform” in India’s financial sector, towards presumably much greater private, including foreign, ownership of financial institutions. This would doubtless mark a significant reversal of the policy towards this sector that has been pursued in the post-independence period.

The IMF, the World Bank, various other agencies of international finance capital, and the U.S. administration, have all been demanding such a reversal for a long time. In fact a senior U.S. government official had suggested to the government of India that even if privatization of the entire  financial sector was not immediately possible, the government could “send a signal” by just privatizing the State Bank of India. The Congress-led government, despite its penchant for neo-liberal “reforms”, nonetheless balked at the idea. The BJP, being a more ruthless servitor of Indian corporate interests, which are now more or less congruent with the interests of globalized capital, is planning to go ahead with imperialist-demanded “reforms”, that is, to push the financial sector in the direction of privatization and foreign domination, from which it had been extricated after independence.

There were very good reasons for such extrication and it may be useful to examine these reasons. First, the financial market does not distinguish between “production” and “speculation”, a distinction that can be understood as follows: if an asset is acquired for “keeps”, that is, for the income stream it promises to yield over a period of time, then that constitutes acquisition for “production”; but if the asset is acquired with the objective of selling it very soon afterwards at a higher price, so that the buyer has no interest in the income, and hence in the production, stream it yields, then that constitutes “speculation”. Now, private financial institutions, driven entirely by commercial considerations, do not distinguish between these two activities, and hence lock up a part of their resources in speculation at the expense of production; a third world economy can scarcely afford this.

Second, even within the realm of production, private financial institutions systematically discriminate between different borrowers in the matter of giving loans. In colonial times, Indian entrepreneurs were systematically discriminated against when they sought finance from banks that were then largely foreign-owned; Indian corporate houses in due course set up their own banks in order to garner finance for their own businesses, but these in turn excluded other borrowers. In particular, small producers, farmers, craftsmen and such like were all excluded from these sources of institutional finance.

Since finance represents command over capital, how this finance is distributed, that is, who gets this finance, which regions it goes to, what activities it is used for, determines the rate and pattern of development of a country; and the systematic exclusion that private financial institutions practised, entailing the exclusion of certain sectors, and of producers engaged in these sectors, acted to distort not only the pattern of development but even to constraint it.

It follows that if finance is to be deployed for production rather than speculation, if it is to be deployed for the development of sectors like agriculture and petty production, then private ownership of financial institutions is singularly incapable of achieving this task; state ownership becomes necessary for this purpose, that is, for effecting economic development in a balanced manner that is in accordance with certain social priorities.

This basic insight had informed the Indian development trajectory prior to the introduction of neo-liberal “reforms”, because of which the Imperial Bank of India had been nationalized in 1955, the life insurance business in 1956, 14 major private banks in 1969, and six other private banks in 1980. This shift towards state ownership of the financial sector also led to a flow of institutional finance towards agriculture that was quite unprecedented, and that made possible the Green Revolution and India’s food self-reliance. In the early sixties India had become dependent on food imports from the U.S. and hence vulnerable to manipulation by U.S. imperialism; the achievement of food self-reliance in that context was a remarkable feat which imperialism continues to attempt to reverse to this day.

It is also because of this fact of predominant state ownership of the financial sector that when the U.S. housing “bubble” collapsed, throwing the entire financial system of the capitalist world into a crisis, India was one of the few countries that was more or less untouched by it. With the exception of the ICICI Bank, the Indian banks had very little foreign assets in their portfolios, and hardly any toxic assets. State ownership had prevented putting millions of depositors’ funds into jeopardy.

Economic liberalization had to an extent undermined the robustness of India’s financial system earlier: certainly, the magnitude of institutional finance flowing into peasant agriculture directly had come down greatly, and a host of intermediaries, who borrow from banks and lend to peasants at much higher, indeed exorbitant, rates of interest, had come up. But the BJP-led government wants apparently to finish off whatever remains of this robustness by accelerating the process of privatization and foreign domination of India’s financial sector.

The arguments officially advanced for abandoning the foreign equity cap in the insurance sector are completely lacking in credibility. One argument is that it would bring in more direct foreign investment into the insurance sector, causing a significant enhancement in its reach and quality, and thereby contribute to development; but if the funds garnered from customers are used for speculative ventures abroad, then it neither contributes to India’s development nor protects customers’ safety. Likewise, the claim that customers would now no longer be tempted to hold assets like gold or real estate, but would hold insurance policies that would be a means of channelling finance for productive purposes, loses its validity if, as is likely, finance is diverted for speculative purposes or to serve monopoly ends through a takeover of smaller enterprises, or through a jacking up of profit margins (and in the process stoking inflation).

The government of course may be entertaining the hope that its insurance reform would boost the “state of confidence” of international financiers in the Indian economy, and thereby contribute towards stemming the financial outflow that is currently occurring, which has made the Indian rupee the weakest currency in Asia. But the proximate reason for the financial outflow is the imposition of stiff tariffs on Indian goods by Donald Trump which creates expectations of a decline in the value of the rupee, and hence actually contributes to such a decline. No amount of financial sector liberalization would negate this outflow as long as Trump’s demand for his “pound of flesh”, in the form inter alia of opening up the Indian economy to freer imports of American dairy products, is not met. The BJP-led government is chary of provoking the farmers who have taught it a lesson once earlier; but no amount of “peace offerings” in the form of opening up the financial sector would suffice to appease Trump and stem the outflow of finance.

In fact, if anything, opening up the financial sector to multinationals and private players would have the very opposite effect of making an even larger financial outflow possible, and hence be counter-productive from the point of view of preventing the rupee’s fall.

What this shows is the absolute limit that the pursuit of neo-liberalism has reached in India. Neo-liberalism has brought great hardship to the peasantry and the petty producers; what Trump is demanding is that this hardship should be further extended and intensified. The immediate alternative that India would face if it refuses to do so is a further fall in its already declining currency value, that would stoke inflation and ultimately bring it under IMF tutelage, as has happened with several of our South Asian neighbours.

The point is not what India should choose between these two options; the point is to overcome the very situation that restricts India’s choice to just these two options. And that requires calling Trump’s bluff by imposing stiff tariffs on American goods, and controls on financial outflows. This of course would presage a paradigm shift in policy, away from neo-liberalism towards greater self-reliance. But the BJP-led government does not have the spine for such a bold move; instead it will use fascistic methods to cover up its eventual capitulation to Trump.