An economist for a finance minister?

An economist for a finance minister?

P. R. Brahmananda

THESE days, many economists prefer to express their views on current economic affairs and policies in articles in financial newspapers. Newspapers currently do not report fully the speeches and viewpoints of economists. It is probable that most political leaders and even lay persons handling economic matters may not read financial columns, even assuming that they understand the nuances of these writings. Unfortunately, economic events and issues do not make for sensational presentations. Yet, once in a while the speeches and opinions of ex-finance ministers do get reported.

Dr Manmohan Singh is not merely the leader of the Opposition in the Rajya Sabha. He is also an economist by training and experience. He has not learnt his job simply by doing. Kenneth Arrow referred to technological and efficiency improvements which could occur through learning by doing. But, he does not seem to have referred to the macro-efficiencies of Finance Ministers. Most economists believe that economics is a superficially easy subject to specialists in other disciplines. But, even Bertrand Russel thought it was a difficult subject to excel in.

Montagu Norman, the Bank of England Governor, would make up his mind on economic policies in the morning and ask economic advisers to explain the reasons for his decision. But, John Maynard Keynes, showed that Montagu Norman was not as professionally efficient from the economy's angle as he could have been had he been an economist. Economic advisers often become excellent finance ministers. They have a better chance of being so than physicists or political science specialists. Most developed countries prefer to trust technical experts in economics to handle top economic matters.

Whether intricate economic issues can be discussed threadbare in Parliament is doubtful. It has been reported that at a Delhi seminar, Dr Manmohan Singh spoke out regarding the targeted eight per cent growth rate in the Tenth Plan. He also seems to have aired his views on the greater involvement of India in global economic matters. It was also reported that he opined that an eight per cent growth rate would require a 30 per cent ratio of savings to income and a substantial rise in the tax-GDP ratio.

He also stated that without a substantial reduction in the fiscal deficit, which he estimated for the economy at 11 per cent, there could be little progress in converting the public sector to a positive saver. Interestingly, his remarks came at a seminar in which the BJP's economic spokesmen also participated.

In his 1995-96 Budget speech, Dr Manmohan Singh put up a target growth rate of eight per cent for the economy. The current Government has also focussed on this number, though all indicators beneficial to that growth rate seem to have disappeared. However, Dr Manmohan Singh has a right to speak about it even though the number has been used by a different regime.

Surely, Dr Manmohan Singh would be aware that the savings ratio and the tax-GDP ratio have slipped. The economy's fiscal deficit has risen three percentage points. The Government has become a negative saver. The mere introduction in full of the presumptive tax may not help increase the tax-GDP ratio. Effective rates of taxation have to be increased and this means, among other things, reducing the exemption limit and making the tax system more progressive. Dr Manmohan Singh knows that administrative improvements by themselves will not contribute much.

Consider the effects of a substantial rise in the tax-GDP ratio. It is in the sphere of indirect taxes that we have lost revenues in terms of a ratio by several percentage points. Are we prepared to raise the effective excise duty rates? Dr Lakdawala, probably, the most practical tax specialist we have had, showed that the blind pursuit of the value-added tax philosophy would lead to a reduction in tax yields. This is what has happened. There can be no control over drawback refunds. The more decentralised the tax system, the lower the yields. One cannot be popular with potential taxpayers and also expect more tax yields.

Insofar as Customs are concerned, we are afraid of the alleged international obligations. Actually, the revenue face of the Budget has become so eroded that a bold Prime Minister and Finance Minister would be required to make up for the huge tax losses incurred in the name of reforms. Our economic structure is such that without hurting huge vested interests, we cannot move up the tax-GDP ratio.

Though we blame the WTO and other organisations for our timidity on the tax front, the fault lies with us. Where are the members of Parliament who can boldly speak of the implication imperatives of the need to raise the tax-GDP ratio? If high growth is our goal, we must be ready to face up to the above implications. Is it not a pity that there is hardly a trained economist, with the exception of Mr Arun Shourie, in the ministerial cadre?

However, Mr Shourie, who handles planning and is known for his outspokenness, is probably not bold enough to speak out on the implications of the eight per cent target growth rate. Dr Manmohan Singh has done that job for him. Mr Kuldip Nayar mentioned in a column that the ruling party or the alliance was thinking in terms of handing over the finance portfolio to the present Law Minister, surely a very able and vocal expert in legal matters, but hardly a technical economist.

But what his report points to is the contempt which the rulers place on technical economic expertise. It is true that economics affects everyone. Samuelson has somewhere stated that even if one wants to consult an astrologer, one should go to a person knowledgeable and trained in that area. (I am sure none of the ministerial colleagues of the distinguished Minister for Education, HRD, etc, would go to the latter to fix the muhurts for the weddings of their daughters!).

At present, our gross savings ratio is just 24 per cent. What Dr Manmohan Singh stated was that it should be raised to 30 per cent for the growth rate to rise to eight per cent. One wishes he had spelt out whether the current policies were conducive to moving up the savings ratio by such a big margin. I wonder whether he is aware that both the Finance Minister and his distinguished economic advisor think that it is only by raising the disposable incomes of the corporate and the individual tax-paying sectors that consumption can be boosted and the recession overcome.

Actually, the Government seems to think that deficiency of savings is not the cause of the low growth rate. Clearly, the current economic policies are the opposite of those policies that can move up the savings ratio. A U-turn is required in the thinking in government circles. The Planning Commission is too feeble to effectively change the parameters of current economic policies.

Why not trust an experienced technical economist to handle the finance portfolio? The adage that experts must be on the tap and not on top has been refuted in modern times. The present Finance Minister has, no doubt, great administrative experience in handling finance. However, even though he may have comparative advantage in that area, why not opt for absolute advantage? The knowledge of political science and administration may make for greater learning abilities in economics, but a trained expert in finance, money and administration would be better suited to handle the bewildering and technically complex economic matters at the top.

These observations bear no malice for anyone and certainly not to a non-economist on whom huge and technical responsibilities have been thrust. Indira Gandhi knew that she was not an economist. Though she entrusted finance to a number of non-economists, she had a powerful battery of full-time economists to advise her. Further, she was all ears with outside economists.

Mr P. V. Narasimha Rao improved on Indira Gandhi's act. He handed over the top portfolios to professionally competent economists. Jawaharlal Nehru leaned on the Planning Commission which was full of economists. However, the tenures of Indira Gandhi and Mr Narasimha Rao were better periods for the economy than that of Jawaharlal Nehru.

Picture: Though the former Finance Minister, Dr Manmohan Singh's target growth rate of eight per cent looms on the horizon, all indicators beneficial to that growth rate seem to have disappeared.