If one has even casually followed the news stream over the last few years, a running theme concerning the economy has been consistent. It is the stock markets having a strong run (‘bullish’ in finance parlance), with abundant capital flowing in, while economies worldwide have been battling runaway inflation and tepid growth rates. The reasons for this are more obvious – the COVID 19-pandemic, a bruising Russo-Ukraine conflict, and muted recovery of China, among others. The most baffling, and disconcerting aspect has been the divergence between the equity or stock markets and the living conditions of the people, with deepening inequality, worrying unemployment and thousands of job losses across sectors. How does one locate this disquieting anomaly amidst the larger features of financial capitalism that have been in vogue for the last many decades?
To grasp this issue, one needs to clear some fundamentals first. Economic growth is an increase in the production and consumption of goods and services within an economy over time, often as a function of increased productivity, technological advancements, population growth, or a combination of these factors. Stocks or equity are just one way for companies to raise capital for maintaining or expanding operations, typically realised as ‘shares’ held by individual or institutional investors. The highs and lows one sees in stock indices are essentially a reflection of expectations of impending or future growth prospects of the entity in terms of profit and other variables like net revenue and existing debt. To illustrate, even during an economic downturn when the general population is struggling to make ends meet, a widespread sentiment of confidence in a sector like electric vehicles may push up the stocks of EV companies. This enriches the wealth of existing shareholders who ride this upward graph, and the companies themselves raise enormous amounts of money through this route. Over the last few years marked by the health pandemic and economic headwinds, the stocks of Tesla and Nvidia, focussing on electric vehicles and artificial intelligence respectively, have witnessed a sharp surge. In short, the ever-present possibility of a difference between current conditions and future expectations generates this duality.
Is this phenomenon entirely due to some zealous investors continuously making their investment decisions in synchronisation with oscillating waves of the market, or are there other factors at play too? Central banks’ monetary policy decisions, particularly changes in interest rates, can significantly impact the economy and the stock market. Lower interest rates can stimulate economic activity and make stocks more attractive. Secondly, while the overall economy might be struggling, individual companies within the stock market may still perform well due to specific factors such as innovation, efficiency, or unique market positioning. Conversely, a booming economy does not guarantee success for all companies, and poor corporate performance can lead to stock market declines.
However, this recurring and conspicuous divergence between stock market movements and the broader economy in India poses multiple pitfalls. This disconnection manifests as a misleading and distorted portrayal of national economic prosperity. It favours a select few who have investments in equity markets, or have the disposable income to do so while neglecting the majority. Such a skewed distribution of wealth aggravates existing socio-economic disparities, perpetuating an environment where the affluent elite amass riches, leaving the broader population grappling with persistent challenges like stagnant wages, job insecurity, and limited economic opportunities. To illustrate through a pertinent example, Swiggy, quite recently, laid off a significant portion of its employees across various levels to ‘cut costs’ or ‘optimise’ before its impending listing on the Indian stock exchange. When a company announces layoffs or cost reductions, investors may perceive it as a proactive measure to improve profitability and operational efficiency. The expectation of lower expenses and higher margins can lead to increased confidence in the company’s financial prospects, driving the stock price higher.
A recent mechanism of political funding in India – electoral bonds – not just magnified the cronyism that has always been a blot on corporate-political relations in the country but also exerted a new blow on basic shareholding principles. A cardinal rule of shareholding structure is that shareholders, big and small, have a right to examine a company’s expenses through various statements that it puts out complying with regulatory requirements. Electoral bonds, by enabling political donations anonymously to parties, pour cold water on this principle by keeping shareholders unaware of where their invested capital is going and nullifying any concern about the choice of the political party(ies) therein. Subsequently, Supreme Court-mandated disclosures have revealed clear cases of quid pro quo. To illustrate, the debt-ridden Vedanta group donated 230.15 crores to the BJP and has publicly expressed its intent to get the government’s approval to set up a semiconductor manufacturing plant. Megha Engineering, which donated about 60% of its total donations of 966 crores to the BJP, bagged the contract of the 14,400-crore Thane-Borivali tunnel, outmaneuvering the infrastructure sector giant L&T whose bid was deemed ineligible.
Such ironies and perils emanate, in many ways, from the fundamental ways in which our economic system is structured. As Karl Polanyi argued in “The Great Transformation’, the construction of a self-regulating market necessitates the separation of society into economic and political realms. While he recognises that the self-regulating market has brought unprecedented material wealth, he suggests this is restrictive in vision since the market falsely considers land, labour and money as commodities, and includes them “to subordinate the substance of society itself to the laws of the market.”
The outcome is extensive societal upheaval, prompting organic reactions from society aimed at safeguarding itself. Essentially, Polanyi contended that when the unfettered market seeks to detach from the social framework, societal inclination towards protective measures emerges naturally. However, what has marked contemporary capitalism is the relative weakness of counter-hegemonic movements. The failure of social resistance to generate and arrest market excesses is complementary to the crisis-ridden nature of financial capitalism, buffeted by recurrent economic downturns, speculative bubbles, and systemic instability. The pursuit of short-term profits, excessive risk-taking, and regulatory failures contribute to the volatility and fragility of financial markets, impairing the overall economy and making it unsustainable for broader society. In addition, governments all across have actively pushed the neoliberal package of the World Bank and IMF through Structural Adjustment Programmes that centrally insisted on pulling back the state in realms of welfare, public sector enterprises, banks, and exchange regulation. While this was moulded under the bona fide terms ‘austerity measures’ and ‘fiscal discipline’, it created the irony of the state pushing for its own withdrawal to nourish self-regulating markets, which then are certainly not spontaneous.
To conclude, one should, at the very least, be vigilant towards the undue influence of financial markets on economic policymaking. Policymakers, swayed by short-term stock market fluctuations, may prioritize measures that cater to market sentiments over addressing the long-standing structural issues hindering holistic growth. These structural issues reveal how the current financial model emerged from the crisis of industrial capitalism. Financial intermediaries such as banks, investment firms, and insurance companies took centre stage with rather benign tasks of mitigating the risks associated with industrial capitalism – mobilizing savings, providing liquidity to businesses, and offering risk management services to investors. However, while industrial capitalism was prone to inventory buildup, falling prices, declining profits, and ultimately, economic downturns, financial capitalism exacerbated these through crises triggered by speculative bubbles, excessive leverage, and inadequate regulatory oversight. To foster a resilient and equitable economy, there is a pressing need to address and weaken these factors head-on, crafting an alternative economic model that can escape these structural ailments and foster a genuinely sustainable growth, steering away from short-term speculative gains that disproportionately benefit a privileged minority.
Lokayata 