BackThe finance ministry’s random walk
The finance ministry needs to be consistent in what it chooses to do
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The finance ministry seems to have tied itself in knots in the debate over how Indian monetary policy is to be set in the future.
The latest version of the Indian Financial Code, released in July, has recommended a monetary policy committee dominated by members who will be appointed by the government rather than the Reserve Bank of India (RBI). The veto that an earlier version of the proposed law had given the governor has also been withdrawn.
A raging controversy has erupted. Critics of this move—such as this newspaper—fear that it will give the government a dominant voice in monetary policy matters. The three most important voices in the finance ministry promptly spoke out to limit the damage. Arun Jaitley, Jayant Sinha and Arvind Subramanian have said that the contentious clause is the view of the Financial Sector Legislative Reforms Commission (FSLRC) rather than the government.
They have thus tried to distance the government from the controversy. But FSLRC chairman B.N. Srikrishna, a retired judge, told this newspaper that the new version of the financial regulation law reflects the views of the government—the changes were made because the government wanted them. And public finance economist M. Govinda Rao, a member of the FSLRC, told Business Standard that the new proposals are not what the FSLRC had recommended. In fact, the panel does not even exist since its term ended in 2013.
This is not the first time the finance ministry has taken a step back in the face of criticism. There are three other episodes in recent months that come to mind.
First, the original version of the 2015-16 budget presented in Parliament had a proposal for the creation of an independent public debt management agency. There was also some unnecessary confusion over whether the central bank would lose control over the money market operations it uses to maintain short-term interest rates close to policy rates. It took a meeting between the finance minister and RBI governor Raghuram Rajan for the government to backtrack.
Second, the finance minister had originally launched a sharp attack on those who accused him, unreasonably, of promoting tax terrorism after his budget proposals on the minimum alternate tax. But Jaitley diluted his position a few weeks later when he assured foreign portfolio investors that the tax would not be imposed on capital gains from the sale of securities.
Third, the finance minister had to face strident opposition to a new, 14-page income-tax return (ITR) form that would have asked individual taxpayers to reveal minute details about their foreign trips. Jaitley was abroad when the controversy erupted and had to get into damage-control mode the moment he was back home. The new ITR form was eventually scrapped.
Should Indian monetary policy be set by a committee dominated by government appointees? Should the task of managing public debt be moved from the central bank to an independent agency? Should foreign portfolio investors who invest through countries with which India has tax treaties be allowed to get away with paying no taxes on trading profits? Should citizens who want the government to crack down on black money refuse to provide more details of their own transactions when they file tax returns?
Each of these issues can be debated. The point to be made here is quite different. The frequent backtracking by the finance ministry over the past few months is hurting its credibility.
It could be argued that the essence of democratic governance is that public opinion matters. But what we have seen in the past few months have been cases of policy indecision. Not only has the finance ministry not been able to anticipate criticism, it has then failed to then stick to its position, at least during the four episodes of controversy we have mentioned.
And that is a case for worry.
What explains the finance ministry’s recent flip-flops? Tell us at views@livemint.com
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