India’s Finance Ministers: Stumbling into Reforms (1977-1998)
AK Bhattacharya
There is often debate on whether economics drives politics or politics trumps economics. The second volume on Indian finance ministers by AKB, as the author is well known as, helps one decide to some extent. While economics drives politics to an extent, the reverse relation is stronger.
A common observation that pervades both the volumes is that the FM is not an independent person or entity. Often, we tend to say that certain FMs did a better job when presenting budgets relative to others. But what AKB reveals in this book, which is as interesting as the first, is that all decisions are centralised with the prime minister. Any major move that is announced by the FM in the Budget is motivated by the PM. And the FM does not really have a choice even if there is a large amount of discomfort with the decision. Not surprisingly, H.M. Patel could do nothing on demonetisation, which then prime minister Morarji Desai was keen on.
We also get to know that RBI governor KR Puri had to quit in 1977 because he was part of the Indira Gandhi establishment and did not find favour with the new government of Morarji Desai. Hence politics had influence on the appointment and tenure of the RBI governor as far back as the Seventies. Much later in the day, governor RN Malhotra resigned in 1990 ahead of his term, as his advice against high government expenditure to the Yashwant Sinha-led finance ministry was not received favourably.
Another well-known ideological conflict was the one between deputy governor YV Reddy of RBI and FM P Chidambaram. The two differed on the pace of rupee ‘depreciation’ that was invoked by RBI, much to the chagrin of the FM during the Asian crisis in 1997. The FM had said in a peeved manner to the RBI deputy governor: “You will never be forgiven for what you have done!”
We also get to know the interference of Indira Gandhi’s sons in issues pertaining to the FM in this period. R Venkataraman did not get along with Sanjay Gandhi, while Pranab Mukherjee had a hard time with Rajiv Gandhi when they were finance ministers. Therefore, we get the message that being an FM is not easy, even though it is the most powerful ministry as this is where all revenue of the government flows in and decisions are taken on how to spend it.
Interestingly, while a lot of appreciation has gone in for the GST, which was introduced more recently, the germination was from an idea sown three decades earlier. The concept of a value-added tax had its origins in the mid-Eighties when VP Singh was FM. It came in the form of MODVAT or modified value added tax. Further, the fiscal responsibility and budget management that we talk of today had its origins in the Eighties in the form of a long term fiscal policy (LTFP), which though different in scope, had a vision for budgeting. While that could be the high point of VP Singh’s tenure, the low point was when the FM went after the industry for tax evasion. It seemed the FM was after Reliance Industries, which did not go down well with the Rajiv Gandhi government.
These anecdotes make the rather voluminous book an interesting read. There are a lot of facts placed on the table and one can get to know about all the reforms that were brought in under different regimes. Given that the period was quite tumultuous, the book also reveals the undercurrents that drove these reforms, which may not be well known to the reader.
While the normal narrative on economic reforms starts with Manmohan Singh under the leadership of Narasimha Rao, the author points out that most ideas on reforms actually prevailed in the office of Yashwant Sinha, who was the FM for a short tenure when Chandrashekhar was PM. More importantly, the reforms agenda was a fallout of the state of the economy. The near insolvency of the country drove the government to the IMF for help, and reforms were a condition placed that had to be implemented to draw the loan.
While Manmohan Singh takes credit for economic reforms, his tenure was also turbulent with the stock market scam involving Harshad Mehta. The author elaborates more on the rather infamous statement made by the FM on ‘not losing sleep’ when the stock market went down. Another clue one picks up is that once reforms were in, there was really no going back. Even while minority bubble governments came and went, the FMs concerned drove the reforms agenda, albeit at different speeds.
Hence, one can say that a series of reforms were brought in from the mid-Eighties. To begin with, they were gradual because moving from a fully regulated set up to a more liberal architecture could only be done in steps. Subsequently, the push came from what one can interpret as the IMF nudging for big bang reforms in the Nineties. Interestingly, while the author does bring out the different political ideologies in this period of almost 15 years ending 1997, alignment with progressive policies was always there. It also shows that progressive fiscal regimes can have loan waivers and cash handouts, which is due to the political economy in action.
The second volume of India’s FMs is based on a time period closer to a larger part of the population today and would be of great interest to the layman as well as researchers. The natural line of interest would be to wait for the author’s third volume, which hopefully will cover the FMs till 2023-24. The questions that would be of utmost interest would be whether FMs are more independent than their predecessors, considering that there have been several reforms undertaken like demonetisation or the Covid policies that were routed more through the monetary and not fiscal prisms. The reader would be eager to read more about these contemporary times.
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