The Finance Ministry’s structure, and of course the deep pink state, often leads it astray, focusing on immediate filling the coffers rather than taking care of the economy.
The economic policy of a country—especially a country committed to reforms—ought to take into account such factors as growth potential, public finance, business climate, investor confidence, state of infrastructure, the existing laws and regulations, and government revenue. However, the last one seems to have eclipsed every other consideration; and revenue maximisation has emerged as a major curse of economic policy. The Cairn and Vodafone tax disputes, which have hugely damaged India’s image and hurt the capacity to attract investment, are the result of the Finance Ministry’s obsession with revenue maximisation.
It is an incontrovertible fact that the Finance Ministry is the prime economic ministry, the only economic ministry on Raisina Hill. It was a finance minister, Manmohan Singh, who announced liberalization in 1991. However, since 2004, when Sonia Gandhi’s rule began, economic reforms have practically stopped—even reversed in many cases. As a consequence, the Finance Ministry, instead of being a harbinger of reforms and acting as the ministry of economic affairs, has been concerned only about revenue generation.
The Finance Ministry’s structure, and of course the deep pink state, often leads it astray, focusing on immediate filling the coffers rather than taking care of the economy. There are five departments in the Finance Ministry—viz. Economic Affairs, Expenditure, Financial Services, Revenue, and Investment & Public Assets Management—each headed by a secretary. A government press release of 11 February 2019 said, “It is a matter of convention that the senior most secretary is designated as finance secretary and while he assumes a co-ordination role, he continues as secretary of his own department.”
In other words, the finance secretary is first among equals; and as finance secretary, is supposed to help craft and execute policies that boost economic growth and development.
Now, in economics—just like in politics and philosophy, as Will Durant said—often the longest distance between two points is the straight line. Consider the case of taxation rates: the lower the rates, the higher the tax collection. Therefore, what is in the best interests of the Revenue Department may not be in the best thing for the economy. Cairn and Vodafone cases highlight this fact.
The Finance Ministry’s stubbornness in Cairn and Vodafone is now part of the record. It needs to be mentioned here that the finance secretary, who authored the disastrous retrospective taxation proposals, R.S. Gujral, was also revenue secretary at the time when he did that. In August 2012, he was moved to the Expenditure Department, but the damage of retrospective taxation was done—and is yet to be undone. Given the push to revenue maximisation, such a policy is understandable on the part of this important ministry.
Dirigisme will live for a long time, if not forever, in our country, thanks to the poison of socialist rhetoric that we have all consumed in our schools and colleges. Economic recovery can’t wait till that time, but some structural changes can be made in the Finance Ministry to lessen the ravages of statism.
One such is: make the Department of Economic Affairs the most important department of the Ministry. It should be under an officer senior to the ones heading other departments. More importantly, the Economic Affairs boss should not be first among equals but the top bureaucrat of the Ministry.
Owing to the immense power and influence of socialist rhetoric—which has been thoroughly discredited all over the world but is still popular in India—politicians are loath to act in consonance with the imperative of wealth creation. They still believe that the economy can be treated like a slave that can be ordered to run fast, even if it is on the steroid called pump-priming. The truth, however, is that it performs best when free. Also, it yields the highest sums in taxes when growth is high, not when the tax administrators are the toughest.
Thankfully, some change is in the offing, for the ruling dispensation is trying to challenge some basic tenets of socialism and politically sell liberalization. Prime Minister Narendra Modi recently said the government has no business to be in business. He had said it earlier too, but now his government seems determined to act on the dictum. “It is government’s duty to support enterprises and businesses. But it is not essential that it should own and run enterprises,” he said.
PM Modi is right. And a major structural change in the Finance Ministry will help government expedite reforms.
Ravi Shanker Kapoor is a freelance journalist.