The currencies of India, Indonesia, Brazil, South Africa and Turkey have fallen quite dramatically against the dollar in the past few months. Whatever their domestic weaknesses, the reasons for this unprecedented decline — ranging between 13 to 21 per cent — are primarily global. In the past 48 hours, as tension mounts in West Asia, an already unprecedented situation has become even more difficult. On Wednesday, the rupee, as also other emerging market currencies, fell yet again as it became apparent that the Obama administration is preparing to bomb Syria. Ignoring the global context, many analysts in India are attributing Tuesday’s big fall in the rupee and the Sensex to the fiscal excesses that the new food security law may create. In reality, the food law did not have much to do with the sharp fall in the rupee’s value. Given that it is party time for bear operators in the financial markets, big players are now looking for any reason to ride on pessimism. The food security law has been actively debated for a year and its cost was worked into the Union Budget for 2013-14. Indeed, no such reaction was seen in the stock market when the Finance Minister announced the outlay in the budget. At most, the extra expenditure on account of the Food Security Bill will be no more than 0.3 per cent a year. Besides, the government explicitly said that it would stick to its fiscal deficit target of 4.5 per cent in 2013-14.
The truth is that big institutional investors have an inherent bias against welfare expenditure. Psychologically, market players seem to assume that any welfare scheme is bad for capital. This is a flawed assumption because the history of the market economy in the West clearly shows that a strong welfare framework has played an integral part in the expansion of capitalism. There is also a lot of hypocrisy in the way market players view government support to various sections of society. They reject loan waivers to farmers but welcome the massive loan restructuring and postponement of repayment obligations done for big business. Among neo-liberal policymakers, there is also a tendency to paint a worse picture than actually exists on the ground in order to push the very same reforms that end up creating external debt traps. The massive support in Parliament for the Food Security Bill sharply contrasted with the lack of support it had from market players and businesses. This chasm between the political class and market players needs to be bridged. As Jean Drèze and Amartya Sen have convincingly argued, nowhere has capitalist growth preceded improvement in human development indices. The market needs to internalise this reality.