What a mess
Lack of cohesion in economic policies, poor implementation and wrong priorities best describe the United Progressive Alliance government. It got worse after Pranab Mukherjee became finance minister. I have often wondered whether he deliberately set out to discredit the government so that the Congress would clamour for him to be made prime minister. But he could not have expected to get the job. Suspicions about him in the Congress’s ruling family would never permit it.
What did Mukherjee not do as finance minister? Overriding everything else was his casual approach to the mounting deficits of government. As finance minister, it was his job to bring the deficit down. Substantial additional expenses on social welfare schemes proposed by Sonia Gandhi’s national advisory council should have met with refusal to spend the extra money, there should have been reduction on other heads, particularly subsidies, measures to make expenditures more efficient, and strenuous efforts to raise revenues. Mukherjee did none of these. Instead, he provided funds (largely stolen by intervening bureaucrats and politicians) for these useful social schemes and allowed the deficit to shoot up each year.
At a time of turbulence in the world economy, with investment funds rushing to ‘safe’ currencies such as the dollar, he introduced a huge retrospective tax (earlier rejected by the Supreme Court) to extract capital gains from the buyer (instead of the seller) in the Vodafone-Hutchison overseas transaction. This frightened foreign investors, especially the retrospective part of his budget measure.
He published the general anti-avoidance regulations rules. They would have been appropriate in earlier ‘good times’. It is necessary to close money-laundering routes such as Mauritius (no capital gains tax) and participatory notes (anonymous market investments from abroad). But when we have to depend on inflows from foreign institutional investors and the current account deficit is growing, it is the wrong time. He supported the obdurate and insensitive finance secretary against the apparent wishes of the prime minister. He publicly chastised the governor of the Reserve Bank of India, who was unsuccessfully trying to control inflation through monetary policy without the necessary fiscal measures by the government. Mukherjee expected the RBI to cut interest rates for stimulating growth. But he would do nothing to reduce the deficit. He appointed a super-committee with himself as its head to oversee the RBI, the securities and exchange board of India and the insurance regulatory and development authority, ostensibly to settle jurisdictional disputes between them.
He did not use his famed political skills to push through the introduction of the direct tax code, goods and services tax, the international financial services regulations in accounting, or a means to regulate the credit-rating agencies. His answer to declining foreign investment was to relax overseas borrowings by companies when India’s reserves were already composed of such short-term and volatile funds. Foreign direct investment remains poor because of investment restrictions. The airline industry is in financial decline and crying out for capital inflows. So is insurance. But Mukherjee, with his ‘socialist pattern’ mindset, was not interested in relaxing limits.
Industrial investment has declined sharply. This is not only because of falling consumer demand but also because of inflation and high costs of borrowing. An important cause of export decline is the fall in iron ore exports. Illegal mining over the years and the ban on it in some states have led to a sharp fall in production, which has also hit industrial growth. The finance ministry should have intervened. Mukherjee could have introduced financial and tax solutions as well as fast-tracked punishment of the culprits with vast black money earnings, held in India and abroad.
The removal of the entry loads in mutual funds by a previous Sebi chairman has led to a sharp decline in mutual fund inflows and the corpus. The government should have appealed against this thoughtless decision that has led to the decline in corpus for most funds. The collapse of the rupee by 25 per cent or so in the last year demanded quick actions by the ministry to tighten foreign exchange outflows and an open sesame for FDI.
However, not all our problems are because of Mukherjee. For example, the airline industry awaits influx of foreign funds that requires raising the cap on FDI. Meanwhile the airlines sink deeper into the red. Mukherjee could have, as finance minister, cautioned the government against supporting Air India unless there was a distancing of the bureaucracy from its management. As it is, no one doubts that the Rs 30,000 crore committed to bail out Air India will also be lost and Air India will come back begging for more in a few years. Foreign direct investment in insurance and retail are hostage to the mercurial Mamata Banerjee.
Mukherjee, like all his predecessors, has ‘disinvested’ in state-owned enterprises, only for raising revenue. He has never expressed concern at the inefficiency of state-owned enterprises largely owing to poor governance and lack of autonomy of managements. He should have pushed for their privatization. But a Indira Gandhi loyalist and pseudo-socialist could not agree to it.
The energy situation is a major economic bottleneck. Power distribution companies are bankrupt and state governments are using their limited funds to finance the losses. The finance ministry should have, long ago (although it has done it now), warned banks to scrutinize financial performance of the state electricity boards and not be comforted by state government support to these boards. Indeed, as with Delhi, they should have been privatized.
Coal India has hugely burdened the economy by poor production efficiencies, leading to coal shortages that have hurt power generation. Coal shortages also hurt the balance of payments owing to rising coal imports to make up for the shortfall. Gas is a classic story of crony capitalism resulting in the nation being held hostage by ministers, bureaucrats and industrialists. The private gas producers have spent apparently excessive capital expenditures and eaten into the government’s profit share. But gas production, despite these vast exploration expenditures, has declined by almost 70 per cent or so in the Krishna-Godavari Basin. The finance minister could have intervened, using his many investigative agencies (enforcement directorate, serious fraud investigation office and so on) and saved the economy.
Food prices have been rising because of the changing demand and serious supply shortages. But exporting sugar created a shortage, imports and inflation. Vegetable and fruit prices have shot up because of demand and poor storage, edible oils and pulses are in short supply. The government could have anticipated these events. Opening India’s borders to trade in food items with Pakistan and Bangladesh might have helped. Of course, these are not in Mukherjee’s bag of blame, but lie with the prime minister and the cabinet.
Mukherjee was never an innovative or imaginative minister in any of the portfolios that he has held. He was no different in his last tenure as finance minister. But this time, he was not just his usual pedestrian self but a poor finance minister. He was better at chairing groups of ministers to resolve contentious issues than leading the finance ministry in difficult times. His time was spent in political firefighting, not in thinking about how to lead the finance ministry.
This government is weak in political skills and experience. In that perspective, Mukherjee is a “towering” politician. The lack of cohesion in the government cannot be blamed on him. But he is entirely responsible for managing the finance ministry badly and, consequently, the present dismal state of the economy.