North Block needs political brain

The tragedy of economic reforms in India can be easily traced to the inadequacies of its finance ministers – especially their lack of political brain. Reforms imply unpleasant decisions and therefore the ability to present the issues to the masses in the most convincing manner is all the more important. That being the case, each of the three finance ministers, Dr.Manmohan Singh, Mr.P.Chidambaram and Mr.Yashwant Sinha, had failed in his mission. Devoid of political sagacity they spelt disaster.

This is not to say that they lacked in personal merit. Dr.Singh, who initiated the reforms is a trained economist with considerable field experience. He was professor of economics, economic advisor to the union government and Reserve Bank Governor before he made his way to the covetous cabin at the North Block. He was the right choice at the right time. Everyone welcomed him. The doctor knew what the nation wanted. No dispute on this.

Dr.Singh, of course had won laurels. He will go down in the country’s economic history as the finance minister who broke the backbone of inflationary psychology in India. Depriving the budgetary mechanism of its inflationary potential. Otherwise the budgetary proposals were the trigger that detonated the time bombs of inflation. Prices had shown a tendency to rise in the wake of every budget. It had been so for the last 40 years. Certainly there were more serious macro economic reasons for the prices to climb. But the budgets always provided fuel injections.

Dr.Singh turned over a new chapter even with his first budget. Those who hoarded stocks anticipating a budgetary boost in prices were disappointed for the first time in decades. There used to be pre-budget rush to buy and save. The parliamentary opposition had difficulty in piecing together a critical reaction to the budget. It was proof enough that Dr.Singh’s budget was unique. This is not to say the price increases were given a burial once and for all. Prices still climbed perhaps without the old thrust and verve. But its frightening dimensions had gone. Leaving the inflationary scales well within pattern. In less than 10 years.

But Dr.Singh cut a sorry figure with his reform measures. In the first place, he sent a wrong message to the stock market that liberalisation meant unlimited profits. His poor grasp on the intricacies of the stock market made things worse. Ever vigilant, the market honchos led by Mr.Harshad Mehta, read the rule-book as they wanted. Without knowing its implications Dr.Singh greeted the market upsurge with ill-concealed enthusiasm. But for the resultant scam, Dr.Singh’s experiments would have had a far better chance of success. 
On the other side, he sent an equally wrong message to the enfeebled sections of the society. He pleaded for relaxed labour laws giving more freedom and elbow room for factories to close and retrench. In other words he wanted to make minced meat of surplus labour both in industry and agriculture. Also to be axed are slum dwellers and most of the farmers. All to let the growth rate roll on. He forgot not for a minute but five full years that he was operating in a democratic set-up where politicians are answerable to voters at large. As for accountability at the decision making level, no one, including himself and the RBI Governor, had no compunction in staying on in their respective positions. After the stock scam.

To be sure, Dr.Singh could have ensured for himself a larger measure of success if he had dealt with the need of a network to absorb the ruinous shocks emanating from the reform process. He should have thought of and, at least, taken the first steps to insulate the weaker sections of the society from the fall out of readjustments in the economic system. His major mistake was that he thought the semi-literate and illiterate voters were aware of his advanced economic lessons. He took a generalised view of things well and ensconced in the AC comfort of the North Block premises. In the ultimate analysis, the Rao government lost the sympathy of ordinary voters. Delaying the reform process by five years.

Then came Mr.P.Chidambaram. An able lawyer, he could present his case in acceptable ways. But politics was not his first love. For him it was a side business and as such he was not well versed in the fencing art of political wheelings and dealings. The privations of the lower layers of the society were not in his focus. Was he having only his clients (existing and potential) in mind while enunciating budgetary proposals? The reform process was put in the back burner as a result. He made errors galore. Leaving the entire system in worse shape than when he took over.

Most glaring among the false steps he took were the income tax changes and the VDIS. As for the first, he gave everything except a negative income tax. How he was persuaded to believe that the lower tax rates could encourage savings and therefore investments is not known. At 26 per cent the savings rate in India was not that low. Taking into account more money was going into speculative purchases, with unaccounted money, in land, buildings, gold, etc, etc. The Chinese society may not be ideal but its savings rate of 40 per cent is facilitated by the reduced scope for speculative transactions.

How far the investments in the country were stimulated by the reduced taxes is not clear. At the same time the fluctuating stock prices had resulted in negative savings for a majority of the tax paying public. The number of farm houses that were mushrooming in and around the capital is emblematic signal of the tilt in the economic policies. Flagged off by Chidambaram.

It is not surprising that an average newspaper reader gathered the impression that the much talked about reforms were meant for the already well off.

If Dr.Singh hoisted an all clear signal for the stock prices, Chidambaram’s budget did not give even a feeble lift to the economy. Hopes that the budgetary incentives would rekindle the industrial flames were belied.

While the stocks did not move, the industrial investments started their southward journey. How to get out of the log-jam? It is now known that the then RBI governor Rangarajan came up with the idea of lowering the interest rates to re-stimulate the economy. A text book approach. But consequences were disastrous. The timing of the interest rate deduction was ominous. Even those with only the basic idea of dismal science would not have done it at that point of time. For, by then, the South-East Asian currencies were in turmoil. The old tigers were ratcheting up their interest rates to defend their currencies.

With interest rates cut by two per cent in two instalments rupee fell easy prey to speculative sharks. The country lost over $2 billion in just two weeks. Luckily for the culprits there was no post-mortem of the colossal loss in the foreign exchange. All that happened was to give marching orders to Rangarajan. Nothing more. Everything ended there.

Bombay stock market was agog with rumours that the top officials in the finance ministry and the RBI were in league with the speculative spoofs.

As finance minister, Chidambaram perpetrated the biggest fraud on the nation with his VDIS. It was much more than a slap on the face of honest tax payers. As we have pointed out earlier the revenue intelligence had a clear insight into the amount of money hidden and the amount that was likely to be disclosed. As per authentic sources, concealed income in terms of gold and jewellery alone was as high as $20 billion. The revenue intelligence was also on record that only a fraction of it would be disclosed. They proved right. Including cash not more than $7 billion was ultimately disclosed. A change in the cut off date smuggled in by some of his departmental secretaries made the calculations go wrong. When the counters were closed, ISI agents, speculators and mafia men got away. Corrupt politicians and bureaucrats also had the escape route they wanted.

Though the names of VDIS beneficiaries are still under wrap the D company reportedly had the full details. Courtesy Rakesh Sharma. The D company agents in India reaped a rich harvest with a wealth of detailed information. According to IT (income tax) grapevine the biggest amount was declared by the son of a congress leader in the south.

Unlike that of Dr.Singh’s budget, Chidambaram’s tax proposals were without the inner steel. However, his antics with the Voluntary Income Disclosure Scheme (VDIS) and low tax rates inspired public awareness about the budgetary implications. Though the opposition was unable to carpenter a cohesive policy frame-work on its own, the common folk were one up their leaders. If the illegal money collected through tax evasion was so huge why the men on the street were being penalised with the heavier doses of taxation? A question Chidambaram could not easily answer? As for the economic reforms he could pay only lip services. The economy needed a major surgery and Chidambaram, like Dr.Singh failed in securing the consent note from those at the receiving end. On the whole his budget was a hogwash which lost another opportunity to take the reform measures forward. Chidambaram also could not furnish a satisfactory answer when his Prime Minister gifted away $2 billion for the sake of a safe seat for him in his home state.

Similarly his protest over the pay commission recommendations, also struck a discordant note in the light of his compromising attitude towards ill-gotten wealth. On the whole, Chidambaram displayed a poverty of moral conviction by presiding over the finance ministry.

Enter Yashwant Sinha. With a ramrod back and a masculine face. A career bureaucrat from the steel frame (IAS). Very matured, enviously intelligent, stunningly studious and sufficiently articulate. Also with a clear grip on administration and a better grasp of the portfolio under his care than his secretaries in the same department. The best candidate to head the prestigious North Block; good pick by Atalji.

Many among the middle class intelligentsia were disappointed with Sinha’s still-born budget when he was finance minister under Chandra Sekhar. It was a budget everyone was looking forward to. Indications were that what was in the offing was a progressive investment, quite unlike the ones the country had seen in the previous 40 years. But what Sinha proposed then Rajiv Gandhi disposed. In the place of a full fledged budget only a note on accounts came. New political equations willed a change in the regime.

Sinha’s second avatar as finance minister also lacked the aura of approbation. Political compulsions were still in the way of taking a realistic assessment of the reform process. Economic growth needed impetus, but poverty amelioration needed what was dubbed as populist measures. The huge subsidies designed for the weaker sections could not past muster with the pontiffs of economic reforms.

Sinha was in a fix. Earning the sobriquet of “roll back Sinha” from his very first budget. As a finance minister his failure in pushing the reform movement stemmed from his inability to cultivate political sagacity. He took the easy way out by overtly trying to please the industrial lobbies, who no doubt, held the key to economic development. But enlisting the co-operation of the masses was equally, or more important. In the process Sinha was able to satisfy none.

There is, of course, a strong case for doing away with economic subsidies. But what should not be forgotten is that even industrialised nations are also in no position to disassociate themselves from the clutches of subsidies. The huge payouts to farmers and other ‘vested interests’ in the developed countries are mind-boggling. With a frail political base Indian governments are in a patently unenviable corner.

In the final tally what derailed the reform process in India was the governments’ poor show in identifying alternate revenue sources. It is not denied that over the years the lot of the common man has improved. Good growth can be seen in life-styles and standard of living. That it is not enough is a different thing. Drastic measures are needed to mobilise funds especially in a country where one percent of the population controls over 70 per cent of economic resources.

The conventional tools of taxation and borrowing have serious limitations even in developing countries. By taking a narrow view on the resources front, Sinha like his predecessors, forced himself into a blind alley. When unsavoury fiscal measures were thought of Sinha could have asked himself whether the same amount or more could be raised without tears from other sources. Unfortunately he was bereft of political instincts. As a result, all his measures, adopted with good economic intentions, had turned out to be a declaration of war on the already crushed middle and lower middle classes. Not to speak of those who stay below the poverty line.

It is a question of priority. Sinha should have at least indulged in loud thinking as to how the weaker sections of the society would react. Weaker sections being a large body with no face of its own. They could not be present or heard at the finance minister’s routine pre-budget sessions. As one attender at North Block sarcastically pointed out, Sinha (like other FMs) listened only to “the people who needed AC rooms just to wear warm woollen suits”

For a finance minister, grappling with the intricacies a do-good image is absolutely essential. That kind of image is difficult to cultivate without a political brain. The lack of political brain in Sinha showed through from the very beginning of his second innings as finance minister. First he made the fatal mistake over retaining all secretaries inherited from the outgoing regime. It is difficult to believe that famous TINO factor worked in their favour. One of them was closely associated with the emergency days and therefore did not endear himself to the public or the voters. And another one, like his mentor Manmohan Singh, favoured the liquidation of everyone and everything for the sake of growth rate. Also chasing him were the controversies over investments by certain financial institutions, especially, the UTI. Quite a few bank chairmen also earned his displeasure for not writing off huge loans to certain industrial houses, which refused to let go their control of the corporates with heavy debt loads.

In the circumstances the public in general thought that the differences in administrative changes was only that of between the tweedledum and the tweedledee. Sinha’s image or whatever that of it there was, received a body blow when his nexus with the Mauritius based investment companies came to the fore. Fearing loss of $600 million in tax collections, the income tax department slapped a notice on some of the FIs for apparent tax evasion. The notices were withdrawn in a day or two with Sinha fuming at the indiscretion of the income tax department.

The public legitimately feel that the tax burden could have been reduced considerably if the department were able to collect so huge an amount. As it finally turned out, a few of the FIIs were behind the Ketan Parakh scam that rocked the stock market. A second time in ten years.

Cynics tell a different tale. Sinha wanted the income tax department to hold back, not mainly because of the possible impact on the foreign exchange reserves. FIIs made hay while Ketan Parekh’s Sun was shining. Paper companies sporting a Mauritius label and surviving on hawala transactions collected a windfall. Was Sinha more worried about his daughter-in-law’s bonus receipts than the welfare of the country’s economy? Who benefited?

Sinha’s return to the quick-sands of scandals was swift. Again due to his lack of political finesse. In playing hide and seek with the FLEX Industries, the finance minister under-estimated the investigative talents and instincts of The Indian Express reporters. And the FLEX chairman and his chaperons at the central excise and customs departments were hooked by CBI. Sinha managed to wear a brave face. The law would take its own course, he was saying. When The Indian Express came out on the supply of his election materials from FLEX Industries Sinha tried to sell his innocence by simply asking “So What?” He thought it all would blow over by simply putting on a brave face himself.

But it did not. The Express struck again. This time about the occupant of his palatial Noida residence. The tenant was none other than a top notch official of FLEX Industries. Caught red handed, Sinha could only try to escape claiming that the new tenant was paying fractionally less rent than his predecessor. Sinha also could only blow hot and cold when confronted with his statement that he is having ‘nil’ other income furnished to the PMO on the eve of his appointment. Could we call it a mere oversight by a three-time finance minister?

If the three finance ministers who were at the helm of affairs at the North Block since the early 90s, had failed in their mission of pushing the economic reforms forward, who would have succeeded in their place? Yes, a hypothetical question.

Economic reforms decree deeper privation, uncertainties, deconstruction of life styles and above all losses in a volatile market. Which in turn calls for totally unpopular measures repugnant to every section of the society. No finance minister would succeed unless he is schooled in political sagacity and persuasiveness. Dr.Singh, Chidambaram and Sinha retired hurt for the same reason.

Finally Sinha is out. Indeed a pathetic end. He has turned out to be a huge liability for a party alienated from the masses not necessarily by his omissions and commissions alone. Sinha fell prey to a convergence of factors over which he was at a loss to exert any sort of control. Newspaper columns were rife with speculation on who would follow him to the North Block. Mention were being made of Dr.Bimal Jalan, the RBI governor, Dr.C.Rangarajan, present Andhra governor, External Affairs minister Jaswant Singh, who briefly looked after the portfolio earlier and Mr.Arun Shourie, the Disinvestment minister. Putting an end to all speculations Jaswant Singh took control of the account book.

A bit of flash back. No member of the council of ministers is supposed to take policy decisions while awaiting the confidence vote. It is an unwritten rule. Seldom violated. It was prime minister Atal Bihari Vajpayee’s first tenure. The experiment lasted only for 13 days. Atalji had the goodness to backout when it became clear that he could not muster the required number of votes in the Lok Sabha and almost every minister in the cabinet then was busy trying to drum up support. No decision was taken by anyone. Jaswant Singh, the then finance minister, was more anxious than most to show that he was a functioning finance minister, ordered an enquiry into a banking transaction at the instance, it is said, of Dr.Rangarajan, the presiding deity at the Mumbai’s Mint Road. On the face of it there is nothing wrong in ordering an enquiry. But the minister was unwilling to learn his lessons on banking. And he is anther aspirant for the north block.

The mistake Jaswant Singh made was had a deleterious impact on banking industry. To be sure credit decisions are identical, whether it is bank X, Y or Z. No banker could be in a position to clear a loan satisfying all the items in the check list. That is why the credit decisions are called commercial. With a great deal of risk built into them. A spot light on one case could disorient others across the spectrum. After that episode bankers were unwilling to take risk. Still they are not out of that trauma. That way, single handed, Jaswant Singh put a break on banking industry.

Jaswant Singh may not qualify for a good finance minister. But it cannot be denied that he had given a good account of himself as external affairs minister. He rode out many a crisis and remained the most articulate spokesman of his ministry. He is more at home with external affairs where his capabilities could have more mileage than it is the case with finance ministry.

One of the most favoured candidates for the North Block was Mr.Arun Shourie, the Disinvestment minister. When he was inducted into the ministry, first as a minister of state and then with cabinet rank, there was subdued enthusiasm for his odyssey. For earlier Shourie was Editor of The Indian Express, a post which carried a higher ranking than that of a cabinet minister. But Shourie’s elevation to the council of ministers was as quirky as his coronation as Editor of the most powerful newspaper in the country. The reason is not far to seek. As it was in the case of journalism where he was lucky enough to avoid the heat and dust of day-to-day working, his migration to the seats of power without spending even a day in the Darwinian jungle of party politics.

Shourie is undoubtedly scholarly with a knack for decompounding most complicated issues. Though he was not rated high as a journalist his ability to organise investigative stories were superb. Those qualities are unfortunately of no help in the moulding of a finance minister. His upper cast outlook can do him in. The testing moment came when Mr.V.P.Singh as prime minister try to stand the existing system on its head. The V.P.Singh government’s decision to implement the Mandel Panel commission recommendations unhooked Shourie. In so many words he argued against giving the society’s deprived sections equality in opportunities. His reason for the well advertised attitude was bizarre. He told in a TV interview that Singh’s was a dangerous move as India had to compete with Japan in the matter of technology. A mind set of that type is the biggest liability one can think of for a political figure.

The need for improving the competitive skills cannot be overstressed. But the denial of the opportunities in the name of efficiency is an unsaleable commodity in a democratic set up. Shourie was far away from the corridors of power then but Shourie being Shourie his mindset and disposition had not changed even after he was anointed as the union minister. For the record Shourie once criticised police bandobust for elected representatives. After a man-handling incident in Bombay he was all for it. As disinvestment minister he was indeed successful but as finance minister he is likely to cut a sorry figure when it comes to presenting unpopular measures in sugar-coated form.

All said and done, India’s experiments with economic reforms were bungled by the three finance ministers who were on the throne in the past decade. Given their background, training and inexperience in the dusty world of politics they took a detached view of reforms. The question of enlisting the co-operation of masses never engaged their attention. How the co-operation of the public could be enlisted was also not discussed. In the event they saw the devil in the populist measures which were devised earlier as cushion to protect those in the lower layers of the society.

A strategic mistake, which every single finance minister made, was to scale down rate of taxation at higher levels even as the prices of key commodities were allowed to go up. As a result, an average newspaper reader drew unfriendly conclusions. Even after long years of reforms there is no reduction in the prices of sugar, foodgrains, edible oil, clothing and essential drugs. Hospital admissions are a nightmare. Primary health centres are dysfunctional. Increase in diesel prices gets translated into rising fares for railways and road transport. The man in the street therefore could be heard to comment that economic reforms meant cheaper cars and not cheaper sugar, rice and transport.

The finance ministers, without exception, had no clear idea of the lofty goals of economic reforms. And much less of the means for achieving those goals. In a country where black money accounts for 40-60 per cent of the GDP, the approach to economic reforms should have been radical. Implementation of reforms need huge capital investments which cannot be easily raised within the framework of traditional fiscal measures. Indeed note has to be taken of the taxable capacity of individuals and corporates.

Take for instance Chida-mbaram’s VDIS. As we have pointed out earlier the hidden wealth was several times more than what was disclosed. If the government could seize $7 billion in the place of just $2 billion it could have given the reform measures a tremendous lift. Chidambaram was known to have been beating his breast when the government employees were given a wage increases to the tune of less than $2 billion. The representatives of government employees then raised the question why Chidambaram was not more aggressive when it came to the issue of pardoning confirmed tax evaders. The situation is worse now. The collapse of UTI has robbed millions of middle class families of their savings.

A more imaginative approach to the economic reforms is what is needed. The big question remains: Who could bell the cat? As we have discussed earlier the finance ministers past and present do not add up. And even those who were in the queue, with godfathers behind them, are also not up to the mark. In fact there is a grievous shortage of candidates who could be depended on to discharge their responsibilities as finance minister amidst the manifold challenges posed by economic reforms and globalisation.

What qualifications should a finance minister have in such trying circumstances? A grounding in economics may be helpful but that is not all. Advanced economies like UK, France and Germany had excellent finance ministers who were not trained as economists. John Major and Jim Callaghan are examples. In US the treasury secretary is picked up with great care from outside the charming political circles. India cannot boast of many finance ministers with the necessary political and intellectual fibre.

Mr.V.P.Singh, finance minister while the late Rajiv Gandhi was prime minister, was perhaps the only exception. Nobody would say that the Raja of Manda was more progressive or less than others. But he certainly had the political instincts to put across fiscal proposals in the most acceptable forms. Again nobody suggested that the only budget he tabled would have ushered in prosperity across the country. But some steps he took were thoughtful and found easy endorsement from the people at large.

Mr.Singh’s honesty and integrity were apparently above board. It is a different thing altogether that his close friend and colleague, Arun Nehru had quietly introduced a caveat into his well advertised mindset. No one would dare to ask, Arun Nehru said, that V.P.Singh should collect money for party funds. And he never did. At the same time he, V.P.Singh, had no scruples in spending the money collected by others even through dubious means. But that allegation did not stick. Mr.Singh’s image shines bright even today.

There was no hint at economic reforms in V.P.Singh’s budget. In fact it was a bit too early and was not fashion. Mainly because budgetary constraints left little room for tax modifications. For that the country had to wait till the turn of the decade. All that was possible for V.P.Singh then was to outline a long term fiscal policy. An unchanged tax structure for years would have been welcomed by one and all on the strength of the adage that an old tax is no tax at all.

V.P.Singh’s greatest achievement as finance minister was to focus public attention on how and why the permit-licence raj had thwarted economic development. Industrialists, he averred, by and large, were more interested in selling import licences and quotas than setting up, let alone, running industries.

Again V.P.Singh was the first and, perhaps the last, to think of cleaning up the Aegean stables as a pre-condition for promoting development. His feeble, but determined efforts to ferret out huge amounts of black money secured him enemies everywhere. A purposeful approach of that type to economic reforms would have earned a high rate of credibility and success. Singh’s unfailing instincts as north block chief did not help him in the south block.
Unfortunately a V.P.Singh cannot be replicated. The country is going to pay a heavy price for its inability to throw up a competent finance minister who can steer the much needed reforms across uncharted territory. Only Atal Bihari Vajpayee, and to some extent, L.K.Advani, have the political knack and the halo to fill the blank. But they are larger than the canvass normally cut out for a finance minister.

The government (irrespective of its hue) is playing with fire. The turmoil seen in Gujarat and elsewhere are symptoms of a deeper ailment. Wrong to dismiss the Gujarat blood bath to resurgent communalism. Sociologists would look elsewhere for a more plausible answer. Is it not economic discontent sublimated? Once the external threat receded and the internal situation became normal the public will became more enlightened about the socio-economic set up that generated inequalities

A set of Bengali intellectuals were once debating the lack of an urge for a Soviet model revolution in India. With so much frustration around, it needed only a lighting rod they insisted. But it did not happen. Or is happening. The Bengali intellectuals attributed the smooth flow of life in India to the stranglehold of Bhagawat Gita on Indian psyche. Especially, its message of maya that relegated worldly life to a tight corner. The religion in now up again with redoubled vigour. But will there be the maya to erase once for all the social and economic injustices now being found everywhere? A trillion dollar question.

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