Static on the FM channel

After the markets closed for trading on April 27 in 2006, stockmarket watchdog Securities and Exchange Board of India banned some 100 brokers, financiers and depository participants from trading. It ranked among the harshest such regulatory decisions and stunned the market.

The next morning a Congress politician (now a Cabinet minister) called on the then Finance Minister P. Chidambaram and wanted the decision of the Sebi, as the markets regulator is called in short, reversed. Sebi's interim order, argued the visitor, was on unlawful grounds and the finance minister should have it reversed.

It was clear that the politician was batting for one particular firm but Chidambaram agreed with his guest. Still, his response was distanced: "If I appear (as a lawyer) against this flawed order, it will take me exactly one minute to have it dismissed," he said. "But I can't help you as the finance minister is not an appellate (court of appeal) to Sebi." Later that day, in Mumbai, Sebi overturned the ban against the firm after its owners supplied it with the relevant facts.

That April Friday decision in North Block, home to the Union Ministry of Finance (MoF) in New Delhi, to keep off a regulator's turf even when it had clearly erred drove home the message of regulatory independence in a maturing, markets-oriented India. Chidambaram, in his six years as finance minister in two ruling regimes, was determined to emphasise the Chinese Wall between government and regulators. Regulatory officials calling on him were always seated on the couch in his room, not at his table, for instance.

Finance Minister Pranab Mukherjee, it seems, is setting the clock back. Early this August, he proposed a committee for resolving disputes between the various financial regulators, making himself its chairman and the Governor of the Reserve Bank of India, or RBI, the vice-chairman. The intent, Mukherjee told Parliament, was purely to intervene in inter-regulator disputes such as the turf battle between Sebi and the Insurance Regulatory and Development Authority (IRDA) over unit-linked insurance plans, investment products that have both an equity investing and life insurance elements embedded in them.

But the way the "super-regulator" committee has been structured compromises the independence of RBI, an institution that is answerable to Parliament. For the first time in a formal structure, the finance minister would sit on a panel with the RBI Governor as, in a sense, his deputy. "It's a double jeopardy if the finance minister himself wants to sit in judgment over regulators as he is the ultimate authority in the MoF," says Yashwant Sinha, who held the finance portfolio in the National Democratic Alliance coalition government.

"There has been a tradition of little interference by the government in RBI's independence except in making appointments (such as of its Governor)," says Kirit Parikh, who has been a member of the economic advisory council of five prime ministers preceding Manmohan Singh. "There is some point in continuing with this and not upsetting the balance."

The manner in which Mukherjee created this super-regulatory structure has come in for criticism, too. The government promulgated an ordinance just five weeks before the monsoon session of Parliament, with the finance minister dismissing all advice against the move. The senior-most bureaucrat in MoF, Finance Secretary Ashok Chawla, opposed the plan on the grounds that it was not for the ministry to discipline regulators.

At a Cabinet meeting, Chidambaram, Home Minister since December 2008, and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia likened the Ordinance to trying to swat a fly with a sledge hammer. Mukherjee, who wasn't available for an interview with Business Today, just dug in his heels.

Unusual Waffling
Mukherjee, known for his razorsharp mind and the aplomb with which he manages relations with the Opposition in Parliament, isn't normally given to recklessness. In fact, the United Progressive Alliance's (UPA) principle troubleshooter is entrusted with enormous responsibilities both inside and outside government.

He heads the maximum number - 15 - of groups of ministers (GoMs) on various policy matters and sits on 34 more. For the Congress Party, he's Mr Fixit for every political situation, be it floor management in Parliament over the Nuclear Liability Bill or the Women's Reservation Bill. He was instrumental in ramming a caste-based census through despite major opposition. The latest feather in his cap was the UPA government's decision to deregulate petrol prices - he headed the empowered GoM tasked with taking that call.

But, in the MoF, considered more high-profile and powerful than the home and defence ministries since the 1991 economic reforms, Mukherjee's hardly delivered the goods in the last 18 months he's run it. Apart from stepping on the toes of regulators, he has missed deadlines on independent India's biggest tax reform. The rollout of the GST (Goods and Services Tax), which he has postponed to April 2011 from an earlier deadline of April 2010, looks set to be delayed yet again. Despite his repeated assurances to Parliament over the past year, inflation, especially in food prices, remains out of control. The unchecked gap between the government's expenses and its revenues is threatening to climb again.

The finance minister, "always seems available to chair GoMs", says Parikh. "It can be easily asked, are the GoMs and the finance ministry getting adequate attention?" At the end of the day, says Sinha, now a member of Parliament representing the Bharatiya Janata Party, "it's the political pressure on Mukherjee that perhaps doesn't leave him with enough time for the MoF - instead of canvassing for the Opposition support on the Nuclear Liability Bill, Mukherjee should have been spending his time in the MoF".

Unlike during Chidambaram's tenure when even junior officials were invited into the finance minister's office for discussions - phone chats, too, were normal - the wait for an audience with Mukherjee can sometimes last a couple of days. "There are no discussions on his (Mukherjee) views on the plan for the MoF for the next few years," says a top bureaucrat of the ministry. "At a senior level what do officials need from FM other than direction?"

Several officials disagreed with Chidambaram's agenda, nicknaming him Tax Collector after his obsession with weekly updates on the mop up figures. But, points out the official, what he expected from his team was well-known.

There is a policy vacuum in the MoF under Mukherjee that the economy can ill-afford - indeed, makes it more vulnerable in case of an extraneous event like, say, a worsening Eurozone crisis or a double-dip recession in the United States. Says the official quoted earlier, who regularly interacts with Mukherjee and insists he remain anonymous: "The FM's heart is in everything but the MoF."

If Not He, Who?
The question then is: who is in charge of the macroeconomy? So far, probably being a senior politician, he has by and large escaped criticism for the slip-ups in the MoF. It would seem he presided over a smart bounce-back of the economy from a slowdown following the global financial meltdown in September 2008. Fact is, by the time Mukherjee made his way into the MoF on January 24, 2009, much of the spadework on the stimulus that eventually amounted to Rs 1.85 trillion to shield the economy from the global downturn had already been done. The first two announcements in the three-part fiscal package were made on December 7, 2008 and on January 2, 2009. Only the third one, unveiled February 16, 2009, was announced by Mukherjee in the interim Union Budget.

Bureaucrats at the highest levels in New Delhi say the real push for the stimulus came primarily from Prime Minister Singh and some of his behindthe-scenes advisors (Ahluwalia being one of them), and, on the monetary policy front, from RBI Governor Duvuri Subbarao. Even after moving into the home ministry after the 26/11 terror attacks in Mumbai, Chidambaram had been kept in the loop on the economy.

A big worry for the economy, meanwhile, looms ahead. The fiscal deficit, which is the difference between the government's revenues and expenditure, doesn't look like it is being reined in with spending climbing sharply. The Prime Minister's Economic Advisory Council has warned that the budgeted level of fiscal deficit in 2010-11 at 5.5 per cent of GDP is beyond the comfort zone and would have been 1.2 percentage points higher but for the lower-than-expected loan waiver and pay and pension arrears. "Such easy options will not be available in the coming years and serious policy measures to contain unproductive expenditures will have to be initiated," it said in its outlook on the economy on July 22.

Ten days later, it was clear the council was not crying wolf. Mukherjee presented to Parliament his very first supplementary demand for funds for 2010-11. The year had yielded the government Rs 1.07 trillion, equivalent to 2.27 per cent of GDP, in revenues from auction of spectrum for third generation mobile phone services (some Rs 77,000 crore more than budgeted), but that didn't stop the minister from making a huge supplementary demand.

At Rs 68,300 crore, the demand is twice the average of such demands over the last five years. It may push fiscal deficit beyond the 5.5 per cent of GDP, a target that Mukherjee had said he was confident of achieving after the spectrum auctions. (The fiscal deficit in 2009-10 was 6.6 per cent, mostly as a result of the stimulus.)

Slipping Targets
The risk of Mukherjee overshooting his fiscal deficit targets will be high, especially if the Food Security Act is implemented at a cost of Rs 1.07 trillion, as per agriculture ministry estimates. Also, while the first supplementary demand covers the compensation from the government to the oil PSUs for holding the sale prices of petro-products below the market levels for 2009-10, the reimbursements for the current fiscal are still uncovered. "I don't see this finance minister planning long term for the rapidly rising unfunded liabilities of government pensions, losses of the state electricity boards, interest on debt repayments, subsidies - all of which could converge at his door and explode," says Suresh Prabhu, former Union power minister.

A potential source of relief to the deficit situation has been lost for at least two years with the GST rollout being delayed, as Mukherjee couldn't generate a consensus on a design for the new tax regime. To begin with, the GST would have boosted GDP by at 0.9 to 1.7 per cent, as per the Thirteenth Finance Commission (TFC) estimates, by creating a uniform national market in addition to hugely simplifying the tax structure.

"Negotiations with the states could have been handled better, but were delayed so much that the FM couldn't make them see the GST as a tax reform; they kept looking at it as a power fight," says Satya Poddar, Tax Partner, Ernst & Young, and one of the nongovernment architects of the GST. Hopes that Mukherjee, the deft negotiator, would deliver on support from the states have come to naught.

The other crucial tax reform, the Direct Taxes Code, or DTC, too, have come for criticism. Parts of the latest version of the DTC that Mukherjee released in June 2010, for instance, disregard previous judgments of courts on cases around the current law, the Income Tax Act 1961, which has evolved over several decades. "Some of the proposals (in the DTC) are highly debatable and may defeat the objective of simplification and reduced litigation," the Institute of Chartered Accountants of India said in a recent editorial in its in-house magazine.

More significantly, for Mukherjee and his team, it lists "the limited horizons of those tasked with implementation" among the risks to the reform. (On August 26, the Cabinet approved a bill on the proposed DTC rules. The MOF has been lagging a rapidly transforming economy built on federal structures. One of the most important recommendations of the TFC was on evolving the MoF as part of an elaborate fiscal consolidation plan deadlined for April 2011, but Mukherjee hasn't even taken the first step of appointing a recommended council on fiscal consolidation. Then, there is the other big threat to economic growth - inflation.

The finance minister has failed to capitalise on a comfortable supply position of wheat and rice - with three bumper wheat harvests in a row - to ease food price inflation. It may not have pinched urban and semi-urban wallets, but there's no getting away from how high inflation hurts the rural poor even if record levels of social spending by the government may have cushioned it a little.

To be sure, Mukherjee's style of functioning is not unheard of. For many in the MoF, it is in some ways a throwback to the 1970s and 1980s, long before the concept of independent regulators or transparency the way the world sees them today had trickled down into the government's conscience. Mukherjee was the finance minister in Indira Gandhi's cabinet in the early 1980s - not the best-known regime for preserving institutions.

Some with a sense of history point out that though he was retained as finance minister by the interim prime minister Rajiv Gandhi in October 1984 after Indira Gandhi's assassination, Mukherjee was replaced with V.P. Singh in January 1985 when the Congress returned to office with an unprecedented majority.

Today, though, there are no other clear contenders for Mukherjee's post. No one qualified on both counts - technical knowledge of economics and political acceptability - for the post of finance minister when Chidambaram was moved to the home ministry. Ahluwalia and Chairman of the PM's Economic Advisory Council C. Rangarajan would have been technically sound, but without a political constituency.

The presence, in the background, of an economist PM, who US President Barack Obama says the world consults on economic policy, has been of comfort to the economy so far. But if the ambitions of 8 to 9 per cent GDP growth and of spreading the wealth around - and, importantly, protecting the economy against external shocks - are to come true, India needs a less distracted finance minister.