What the new stage of capitalism augurs for India
INDIA is poised to become a global powerhouse, but not because of what you have been told. We will emerge as a major power because of the peculiar advantages that our capitalist class has over their counterparts in other parts of the world. For want of a better term, I shall call this arbitrage capitalism, which is a 21st-century version of mercantile capital.
But what is capitalism? It is a system in which economic actors are divided into owners of capital and owners of labour-power (the ability to do labour). The owners of capital buy raw material from other capitalists and labour-power from workers and set them to work to produce commodities. These commodities have a higher value than their inputs, allowing capitalists to sell them for a profit. The profit motive, therefore, leads to a continuous expansion of output. This is what we call economic growth.
This economic system didn’t emerge overnight — it took economic and political struggles for it to replace older economic systems, where workers were tied to the land or to their masters, and could not freely sell their labour-power to capitalists. The first forms of capitalism simply involved arbitrage, or earning from moving goods from a cheaper market to one which commanded higher prices. This gave birth to the great merchant houses of Europe that gradually gained heft in royal courts. It also led to the formation of various East India companies, which then carved up the non-mercantile regions of the world into their colonies.
History tells us that Western industrial capitalism could not have developed without going through a stage of ‘mercantilism’, where certain industries got state protection through tariff barriers. One such is the fabled British textile industry, which is often held up as the first example of the Industrial Revolution. Throughout the 1700s, prohibitive duties were imposed on Indian cotton textiles to protect English cotton producers. Between 1815 and 1832, tariffs as high as 1000 per cent were imposed on Indian goods to help English producers compete against them. A Parliamentary inquiry in Britain admitted that, without such harsh protective duties on Indian goods, “the mills of Paisley and Manchester would have been stopped in their outset, and could scarcely have been again set in motion, even by the power of steam. They were created by the sacrifice of Indian manufacture.”
India already had powerful trading and banking communities. The most famous of them came from Gujarat and the Marwar region. There were other groups as well — the Khatris of Punjab and the Chettiars of the south. If India had been independent, it is possible that big industrial houses might have emerged from within these communities. Instead, they had to focus on being traders who facilitated the colonial trade. Of course, some of them did found industries, but not of the scale that took place in the West or even Japan.
The conditions imposed by colonialism inadvertently honed the mercantile traditions of Indian trading communities. They upgraded their skills of arbitrage between different markets, both in terms of merchandise and finance. This is perhaps one reason why we have such a robust derivatives market, which is entirely based on making money through arbitrage. We can see this dominance of ‘arbitrage capitalism’ even in our equity markets, where a large chunk of the daily trade is done without taking the final delivery of the shares that are bought and sold. Much of it is just ‘day trading’, where an equity investor gains (or loses) money by buying shares and then selling them within the same day, before they are actually ‘delivered’ to his or her account.
It is my contention that this skill will be of immense value in the new stage of capitalism that we have entered. Here money is not made by producing more value; it is made by seeking rents and trading margins from goods and services produced elsewhere. Amazon, for instance, is a company that takes rent for owning a marketplace, much like a feudal lord used to charge traders and guilds in medieval Europe. Google, Facebook and X have similar earning models, where they charge producers money for using their digital real estate for reaching consumers and making direct sales.
In classical industrial capitalism, the marketplace is supposed to be free. The only cost producers incur is what they have to pay to a wholesale or retail trader. In today’s capitalism, marketplaces are increasingly shifting to cyberspace, where they are owned by mega-monopolies. Old-school capitalist profits are shrinking because of this, while those of the marketplace owner are rising. Producers have no option but to cut costs, and that means pruning their workforce. This is why artificial intelligence (AI) is becoming increasingly popular as businesses desperately try to cut costs to maintain their margins.
It is no coincidence that the owners of digital marketplaces, with their big treasure chests of finance, are also the biggest investors in AI. This is similar to how the first big industrial houses expanded into all promising sectors and became large conglomerates. All money is flowing into these companies, which combine ownership of marketplaces with investments in AI and robotics. Today, finance capital makes most of its money by investing in shares of such companies, even if they do not offer commensurate earnings.
India’s capitalist class is especially suited for this kind of arbitrage play, both in terms of controlling and managing marketplaces, and in earning from financial investments. What our ‘arbitrage capitalists’ need is a neo-mercantilist government, which will protect and back their moves. Of course, any protectionist policy by the Indian Government will face a huge backlash from the West, and from the global tech giants. However, India is uniquely positioned today as a potential ally for the West against China. The Modi government has already started taking advantage of this opportunity, and we will only see more of it in coming years. And as India flexes its global muscle, so will India’s arbitrage capitalists.
The author is a senior economic analyst
