The Long March

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Of five Finance Ministers

When Manmohan Singh rose in the Lok Sabha on 24 July 1991 and declaimed that no power could stop an idea whose time had come, he was only partially correct. In India, it is a rare Finance Minister who has ever had a clean slate to leave the imprint he desires. Even Singh’s reforms were a product of adverse circumstances that forced him to innovate. Just a year before, Madhu Dandavate, who presented the last complete Budget before Singh, was content with railing against “conspicuous consumption”, “black marketeers” and issuing other socialist homilies.

Since then the consensus is that most Finance Ministers have been reformers, some avid and some reluctant. In reality, this is an intellectual shortcut. There are three parameters that are useful in understanding how (and why) these ministers have chosen their course of action. The first and most obvious reality is that 60 per cent of India’s population lives in rural areas and accounts for an increasingly dwindling share of national output. It is also a segment that is subject to periodic crises of livelihood. The brake this class puts on what a Finance Minister may want to do is often not appreciated. But then, as Sherlock Holmes said, there is nothing more elusive than an obvious fact. The second is that in the last 25 years, Budgets have increasingly lost the usual political distinctions of ‘Right’ and ‘Left’ that were so sharp from the mid-1960s until 1990. Such distinctions in a given Budget now manifest in the choice between favouring investment or consumption. The final point is technical. Budgets are now devices to smoothen what economists call ‘political business cycles’. At one time, the ruling party (or coalition) would open the spending taps in the fourth year of its rule—to improve its chances for re-election in the General Election. Now the trend is to start gearing up for Parliamentary elections much earlier. The specifics are debatable, but at least two Budgets in recent memory displayed this trend very clearly.

This triangulation, so to speak, allows one to solve many puzzles. Why, for example, a socialist like Dandavate shied away from implementing an India-wide Employment Guarantee Scheme (EGS) in 1990 while a much more ‘reform-oriented’ P Chidambaram was able to spend massively on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). While Dandavate did not have money to undertake what was clearly an ideological foray, Chidambaram was only preparing for the electoral battle of 2009, with ideology having hardly anything to do with budgetary allocations. All this also makes it easier to understand why a Finance Minister with avowed ‘swadeshi’ sympathies such as Yashwant Sinha was probably one of the most aggressive globalisers seen in North Block in the 1990s.

The Accidental Reformer

Manmohan Singh was probably the most unusual, and original, in the cast of Finance Ministers in the last quarter century. There could not be a more improbable reformer. The details of what Singh did and how—right from being woken up early on 20 June 1991 to be asked if he was willing to become Finance Minister—are well-known. What remains fascinating even 25 years later is how a person, rooted in a sarkari culture that had a large role to play in creating the economic mess of the late 1980s, underwent an intellectual change of such a magnitude. At Cambridge University, Singh was tutored by the two great Leftist economists of that age—Joan Robinson and Nicholas Kaldor. In these times, it is hard to convey the confidence with which economists of that age predicted increases in national income, the speed of economic growth and development in general. For anyone acquainted with the economic theories of that time, an expanding economy was only natural. These ideas went up in smoke—as debt and balance of payments crises loomed large—by the late 1980s.

What makes Singh unique was his intellectual conversion to markets. The contrast with other crisis-ridden economies was stark. In Russia, Boris Yeltsin had a Manmohan Singh analogue in Yegor Gaidar; Poland had a Leszek Balcerowicz. But the situations were very different in one respect: both Gaidar and Balcerowicz were ‘outsiders’ who had to be brought in to clear the mess. Singh was an insider’s insider who knew the byzantine ways of India’s bureaucracy. He is a living testament to the claim that ideas matter and have a major role in shaping human affairs. But as in so many other such instances in history, Singh’s leap of faith was made possible by a crisis.

The Home Marketer from Patna

By the time Yashwant Sinha presented the Budget in 1998, India had changed to a degree that Singh probably could not have imagined. The domains where Sinha carried out (or tried to carry out) reforms were taboo in Singh’s time. From changes in the insurance sector—which he initiated but had to wait for the second NDA Government that came to power in 2014—to reforms in many political sensitive areas, it was Sinha who took the lead. In the period between the tough conditions under which the 1991 reforms began and the ‘lax’ decade from 2004 to 2014, Sinha probably had the widest amplitude among all Finance Ministers to impart a future-oriented direction to the Indian economy. But even this Finance Minister had a hard constraint: the backwardness of India’s rural sector. At the fagend of the 20th century—on the eve of the breakthroughs that enabled India to create the IT companies it became famous for—this Finance Minister had to worry about generating demand in villages.

In his own words, he said that ‘the (1998) Budget had a philosophy: that demand must be generated in order to give momentum to the economy, and that demand would come from rural India, where the largest number of our people live. If the rural areas did not generate demand, industrial India would not be able to move forward.’ (Confessions of a Swadeshi Reformer, Penguin India, 2007, page 62).

These words echo India’s past, present and future at the same time. The past because they recapitulate the famous debates of the 1970s about the path India should take to achieve economic growth—whether the country should rely on its ‘home market’ or export its way to development. The future, because almost two decades later, another NDA Finance Minister was confronted with the same problem of a crisis-ridden rural sector.

Populists at Play

By the time Manmohan Singh became Prime Minister, something changed in India, and not for the best. In the decade from 2004 to 2014, economic reforms became a bad word. The Government of the day—the Congress-led UPA—initiated legislation that left a terrible fiscal and economic imprint on the Indian economy. From MGNREGA to the (yet to be implemented) National Food Security Law, ‘progressive’ social legislation seemed to have returned from the past with a vengeance. Finance Minister P Chidambaram—probably against his better instincts—had to make huge budgetary provisions for these laws. In 2007, government expenditures rose by historic levels.

If there was any age in India when the Government of the day thought of wedding state spending directly with its future political prospects, then surely this was that age. Unlike ‘Garibi Hatao’ and other socialist experiments of an earlier age, the effort now was clearly to begin thinking quite early on in the Government’s tenure about winning the next election. The Budget became an important cog in this huge political wheel. This was unprecedented in the history of India’s Budgets. In the socialist period (1960-1990), expenditures were committed on the basis of priorities dictated by Planning. Here and there, just before elections, governments did spend money to woo the electorate. But from 2004-14, there was a qualitative change in the approach to this. After winning the 2004 election, UPA’s spending priorities were predicated on winning the 2009 polls. The efforts paid off even if the cost to the Indian economy was huge. These expenditures were funded directly by budgetary allocations made under the watch of three Finance Ministers: P Chidambaram, Manmohan Singh (who held the portfolio for two short periods even as Prime Minister) and Pranab Mukherjee.

The last phase of this period was a dreary one. Not only did India find itself facing global headwinds—such as extremely high oil prices—but it also made serious policy missteps such as retrospective taxation that hurt its investment prospects.

If there was one odd person in this trinity, it was Mukherjee. Attuned to the rather different economic and political rhythms of the 1970s, this Finance Minister did not worry about the global fallout of imposing retrospective taxation on an overseas deal involving the transfer of a domestic telecom firm’s ownership. India’s image was tarnished by this episode which made the country look like a tinpot dictatorship more than a responsible economic actor. But overall, such behaviour was within the bounds of UPA’s political economy: re-distributive and against the private sector getting ‘too big for its boots’.

The Chosen Modifier

The present period, under Arun Jaitley as Finance Minister, is one of a slow and painful undoing of past mistakes. Two past legacies are writ large. One, the crisis in rural India—due to a drought in the past two years—not only threatens to eat into rural incomes, but more dangerously, has implications for overall demand in the Indian economy. Two, and this is a direct legacy of the last one decade, no government can now ignore the imperatives of ‘fixing’ the political business cycle. An ‘economic’ interpretation of the 2016-17 Budget is that higher public investment in the rural sector makes sense at a time when, among other reasons, a crisis in the banking sector holds back private investment. A more cynical observation would be that the General Election of 2019 is not too far away.

One need not make an undue song and dance about this; after all, governments and political parties have to respond to political realities. But the truth is that, if on the one hand, the Budget exercise has become less significant since the 1970s— when the Government monopolised virtually all important economic tasks—on the other, Budgets are subjected to ever greater distributive pressures. The key difference between the NDA and the UPA approaches is that the former favours investment as a source of growth—by creating physical infrastructure and public investments in agriculture—and the latter, consumption-driven growth. In this, India is catching up fast with the trends that differentiate conservative and liberal governments in Western democracies.

So will India ever see Budgets being formulated in a textbook, optimal, fashion? Even in Western countries—with far greater social homogeneity and incomparably higher per capita incomes—that does not happen. In India, where the Budget exercise is path dependent in a far more cruel fashion, the personality of the Finance Minister is the last ingredient in what is dished out on the last day of February every year. So when commentators and politicians say that a Budget lacks a ‘big idea’, perhaps they should reconsider. The age of big ideas is long gone; this is the time of preparing for the next electoral battle. Maybe in the future this will change, just as the age of ‘big ideas’ ended in 1990. But until then, let us sit back and enjoy the spectacle.