In defence of the Finance Ministry

There is much to criticise the Finance Ministry about, but recently it has been at the receiving end of both unwarranted disrespect and spurious criticism from people who should know better, and that warrants some defence.

Let’s talk about the unwarranted disrespect first. Following demonetisation and the criticism the Reserve Bank of India received for just being another arm of the Finance Ministry, it was only natural that the institution and its Governor would try to re-establish the perception that it is independent of government pressure.

But what call is there for the members of the Monetary Policy Committee to refuse an invitation from the Finance Minister to meet before the last interest rate announcement? The argument can’t be that they didn’t want to meet Arun Jaitley because he would try to pressurise them into lowering interest rates. Of course he would! That’s what all governments want — lower interest rates to boost private sentiment, consumption, and investment. The member should know this even without meeting the Finance Minister.

It’s a simple matter of courtesy to meet him and stand firm regardless. That’s what gives an impression of independence. Refusing to meet him and calling it autonomy sends out quite the opposite signal.

But the worst form of discourtesy came from Urjit Patel himself. If he is unhappy with the Finance Minister, then that should remain between the two of them. The Governor has no business making it public at a press conference that the members of the MPC unanimously refused to go to meet Jaitley. Considering Patel has been silent on much more important matters, why break character now?

The other culprit — this time of spurious criticism — is none other than former Prime Minister and one-time Finance Minister, Manmohan Singh. Following the release of the less-than-thrilling Q4 GDP numbers, Manmohan Singh came out with one of his periodic statements on the Indian economy and stabbed himself in the foot. “Private sector investment has collapsed and the economy is running on just one engine of public spending,” he said. Well done, Sir, for pointing out what even a BA student in economics could have pointed out. One would expect from you, however, a deeper analysis of the situation and a more accurate assignment of blame.

Private investment has collapsed for various reasons, including a sluggish world economy and a lack of demand in the domestic economy, but perhaps the most important reasons are the huge overcapacity created during the previous government’s tenure and the unserviceable loans taken by companies to finance this overcapacity.

The overwhelming bulk of banking non-performing assets — basically loans given out to people and companies who now can’t repay them — was created during the UPA’s tenure. And if Manmohan Singh would like a reminder, he was Prime Minister then.

Loans were given freely for projects that were valued far above their real cost, due diligence was ignored, and most of this was happening in the public sector banks. The Finance Ministry under P Chidambaram should have stepped in. But it didn’t. And now companies are in no position to invest any more since even their current capacity is underutilised, and the banks look decidedly ill every time a company asks for a large loan. So, yes, private investment has collapsed. But the bulk of that is not down to the policies of this government.

It’s far easier to fire salvos than to introspect — but introspection is precisely what the stars of this piece need to do. Urjit Patel and the other members of the MPC need to ruminate on whether the Finance Ministry is really the enemy. And the Opposition leaders need to understand that the bulk of the economic issues they can raise stems from the mismanagement of the Finance Ministry under them.