View: A ‘full-time’ politician is best suited for the FM’s job right now

Dhiraj NayyarShould an economist be finance minister as the economy fights its way out of Covid-induced shock? Many economists would say yes, and put in an application for the job. But, right now, a ‘full-time’ politician is best suited for the task at hand.Consider the circumstances. The economic shock has devastated three of the four engines of economic growth: private consumption, private investment and exports. The finance minister needs to pilot a $2.6 trillion economy on one engine: government spending. This requires greater skills in politics than economics.There is no question that GoI needs to spend more. The quantum of that spending is a political call. Whether the additional resources would be raised through borrowing, thereby risking pushing interest rates up for the rest of the economy, or through monetisation of debt, thereby risking future inflation, is also a political decision.Even more important than the quantum of spending is the matter of quality of spending. Not all kinds of government-spending need to rise. The principle of austerity may be applied to some unnecessary expenditures, while stimulus is applied to others. This requires a negotiation with the different line ministries of GoI, which requires political skills and stature that a technocrat may not automatically possess. Political choices have to be made on which segments of the economy should get the maximum benefit — the poor or middle class? Small-scale industries or big corporates? Sectors worst hit by Covid or across the board?The second-most important task after the very tough one of managing the macroeconomy is dealing with the acute shortage of revenue that the state governments are facing. Unlike the Centre, states cannot print money. They must also borrow at higher rates, and only after fulfilling conditions imposed by the Centre. The 28 states also have an important role in reviving economic activity. It requires a political finance minister to engage with chief ministers and state finance ministers to ensure that ‘Team India’ works with a united purpose with necessary adjustments and compromises.Ultimately, any solution to the problem of shortage in finances has to be political —whether it involves raising tax rates, thereby risking further slowdown of private economic activity, or through borrowing by the Centre, thereby increasing the fiscal deficit, or through borrowing by states, thereby relaxing conditions for borrowing that could potentially unleash unproductive expenditure. There are risks and benefits in all. An economist would have no special skill in negotiating the right outcome.The third task at hand for the finance minister is to advocate structural reforms that would stimulate private investment in the medium term. Nirmala Sitharaman, to her credit, took the big reformist step of cutting corporate tax rates in 2019, which economists would support. The finance ministry is also taking the controversial (from an economist’s point of view) but perhaps necessary steps to raise tariffs in certain sectors to encourage local manufacturing. Further reforms on whether to aggressively privatise public sector companies, or whether to divest a handful of public sector banks are political calls.Economists have been saying for long that divestment must be implemented along with a host of reforms in factor markets like land and labour. The point to note is that all structural reform inevitably creates a set of losers and winners. The former is entrenched and more vocal; the latter are not organised. Successful reform needs political management of this dynamic.Despite this, economists pin their hope on the ‘economist finance minister’ Manmohan Singh precedent. But is 2020 like 1991? Not really. Then, India was on the verge of a sovereign debt default. Its economy did not have the inherent strength that it has today (per-capita income was just $350 compared to $2,000 now). There was a minority government led by Prime Minister P V Narasimha Rao who was not a mass leader.In those circumstances, a mild-mannered but credible economist was a useful figurehead in whose name politically unpopular reform would be implemented. If things went wrong, the PM could always deflect blame. However, the political heavy-lifting was done by PM Narasimha Rao behind the scenes. Overall, reform was implemented through stealth, tactically, and not strategically.The mandate, leadership and governing style of the present government are very different. When convinced, the Narendra Modi government is not averse to making and owning difficult decisions. It has a competent, if not celebrity, team of economists to lend it technical advice. The prime minister himself is a magnet for investors and overall confidence in the economy. More than technocrat or star, the FM needs to be a negotiator and arbiter of interests and advice.(The writer is chief economist, Vedanta. Views expressed are personal.)