Nirmala Sitharaman has notched up a record merely by taking over as Finance
Minister in the Modi 2.0 government. She will be the first woman to hold this
position as a stand-alone charge. Indira Gandhi was the first woman Finance
Minister in 1970-71. But she was already Prime Minister and assumed the
position from Finance Minister Morarji Desai when he resigned abruptly in July
1969. She went on to present the 1970-71 budget.
Patriarchy gives way after five decades
That was nearly five decades ago. One can argue it illustrates the deep roots of
patriarchy in our political system, that it took twenty nine changes of Finance
Minister since the time Indira Gandhi held that post, for another woman to get
a chance to manage the economy’s finances.
Que sera sera – will she be a steely Durga or a forgiving Laxmi?
So, what kind of a Finance Minister will she be? Will she emulate Durga and be
strong against the insidious power of the corrupt to bend rules in their favour;
firm against political pressure in favour of distributing freebies to constituents
and ruthless in allocating fiscal resources per the bang-for-the-buck they bring?
Or will she instead emulate gentle Laxmi and spread good-will and well-being
all around ensuring always that the poor get their due share via the equitable
distribution of public largesse?
She certainly has sound instincts. Readers will remember that
on taking over as Defence Minister she, like any other administrator with
nothing to hide, immediately agreed to share the papers related to the Rafale
jet fighter acquisition with Parliament. She had to backtrack on that assurance
because the she had underestimated the undertow of confrontational politics
on-going at that time.
There will be many more such minefields in the Finance portfolio which will
necessarily curb her free will and independent spirit and force her to remain
aligned with the Home Minister Amit Shah who enjoys the Prime Minister’s
confidence and is arguably an expert on balancing the three legs of the public
policy stool – public interest, political gains for the BJP and corporate interest.
Minister Sitharaman is likely to lean more towards the benevolent Laxmi role
model which is a proxy for the social welfare approach. First off the bat, the
cabinet has already expanded the income transfer scheme of Rs 6000 per annum beyond small and marginal farmers to all famers. The additional cost of
Rs 120 billion will increase the allocation for fiscal 2020 to Rs 872 billion while
the numbers benefitted will increase from 125 million to 145 million.
Income transfers as charity
Other than it being en election promise of the BJP, the scheme has little merit
for three reasons. First providing income support to large farmers is wholly a
non-merit subsidy. Second, proving income support only to those who own
land but not to the poorer farmer who leases in additional land is again non-
merit. Lastly, the golden rule for introducing direct income transfers is to set
them off against existing non-merit subsidies like subsidised fertiliser, water
and power. Not doing so just pancakes one subsidy over another in a fiscally
Social welfare and human development- can more funds be allocated
But the troubles don’t end at just enhancing the social welfare budget. The
union government’s health budget needs to be doubled and Ayushman Bharat
provided for substantively if it is to spark a boom in private medical facilities
and jobs via a revenue model based on publicly provided insurance premia.
The problem of low demand
Industry is trapped between low demand, on the one hand and high cost
production due to the high cost of debt and high transaction and transit cost
for doing business. These drivers make fresh investment unviable. Inflating the
economy publicly can improve demand but runs the risk of unsustainable fiscal
deficits and lowered credit ratings internationally.
Public sector banks high costs & poor governance
A key culprit is our inefficient, high-cost banking system, 70 per cent of which is
publicly owned. But improving corporate governance in public sector banks
means opening up the Pandora’s Box of the nexus between state and national
level politicians and crooked management in banks. Making banks
autonomous of the government would require enormous political capital and
is a job for a Durga type of FM. Tough political battles, even within the BJP,
would have to be fought to succeed.
Stagnant exports but booming imports
The current account deficit remains stuck at 2.5 per cent of GDP. Exports are
flat and likely to be further impacted – albeit marginally- by the withdrawal of
preferential tariff for specified Indian imports into the US. The total trade
disruption might not exceed Rs 7 billion or 1.5 per cent of our exports. But
when trade growth is stagnant every 1 per cent of exports lost increases the
CAD by 0.2 percentage points of GDP unless imports are symmetrically reduced. Oil price increase and an increase in imports of 1 per cent would further increase the CAD.
Strong INR bad for exports and for domestic manufacturing
Can Minister Sitharaman go around the party line which equates a “strong”
INR with national strength? Setting exchange rates at rational levels is a tricky
business which trade and macro-economic stability experts can best advise on.
But keeping the INR artificially strong is the surest way to kill domestic
manufacturers and service providers because it exposes them to foreign
competition. It also kills our exports by making them more expensive abroad
than our competitors.
Plugging the current account with “hot money” inflows or borrowed foreign capital is unsustainable
Filling the hole in the current account with the import of “hot money” is not a
risk free sustainable option either. As soon as the oil prices increase, hot
money exits India, anticipating a fiscal crisis. Will the Finance Ministry lead on a
export supportive exchange rate policy, so that the INR floats on a market
determined basis with RBI intervention restricted to cases of massive current
manipulation or periods of huge external shocks?
Fiscal austerity is key to recovery
Most importantly, can the Finance Ministry impose a two year period of
austerity so that the fiscal deficit comes down from the near 4 per cent of GDP
at the end of fiscal 2019 and back onto a level of 3 per cent by fiscal 2020 with
a downward glide path to 2.5 per cent of GDP?
Trim the revenue budget to minimise public borrowing
The projected effective revenue deficit for fiscal 2020 is 1.3 per cent of GDP
amounting to Rs 2.7 trillion. Will the new Finance Minister plan to balance the
revenue budget by fiscal 2021 by eliminating wasteful revenue expenditure
which is financed by loans? This would reduce the draft made by public
borrowings on private savings thereby lowering the cost of capital for the
No prior expectations make for good outcomes
It’s a crowded agenda for Minister Sitharaman. The good news is that she
comes with no embedded, prior-commitments to any constituency. One hopes
she will make use of the relative freedom she enjoys today. Such blessings
rarely last long.