Jaswant's Churchillian adventure

The finance minister should avoid being defeated by experts

If historical analogies are useful in economic analysis, it is surely worth comparing Jaswant Singh's present position with that of Winston Churchill in 1925 when, as Chancellor of Exchequer, he was persuaded to take Britain back to the gold standard at pre-war first world-war parities.

This meant a revaluation of sterling by 10 per cent. Churchill had severe doubts about the merit of this decision and he expressed his qualms by notes to Treasury officials in the following words

"The Treasury has never it seems to me faced the profound significance of what Mr Keynes calls "the paradox of unemployment amid dearth". The Governor (Montagu Norman) shows himself perfectly happy in the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed." (Robert Dimand 'The origins of the Keynesian Revolution Stanford University Press 1988.).

Perhaps Jaswant Singh suffers from similar reservations. For politically oriented Finance Ministers like both Churchill and Jaswant Singh, the self-evident surplus in external reserves or credit must grate ill when it is combined with the significant unemployment and poverty, respectively observed by them.

Churchill readily acknowledged that he did not "see even 'through a glass darkly' how the credit policy of the country could be handled so as to bridge the gap between the dearth of goods and a surplus of labour; and well I realise the danger of experiment to that end. The seas of history are full of famous wrecks."

As a politician like Churchill perhaps Jaswant Singh feels the pressure of the jobless and the underemployed more than his bureaucrats; Somewhat wearily he must reflect as Churchill did that he would rather follow other policies and say, "Still if I could see a way I would rather follow it than any other. I would rather see Finance less proud and Industry more content." Jaswant Singh would echo that remark by substituting the word Agriculture for Industry.

Ultimately in spite of all his doubts Churchill gave in to the experts. He conceded to his officials,"Taken together I expect you know more about it than anyone else in the world." He could not however resist adding, "But the fact that this island with its enormous resources is unable to maintain its population is surely a cause for deepest heart-searching." (Moggridge 'The Return to Gold 1925'). Once again I see parallels to this remark in Jaswant's concerns.

But however illustrative analogies are, it is wisest not to pursue them too far. One should perhaps end the comparison between Churchill and Jaswant by observing that the bulk of informed established opinion was against Churchill and forced him to return to the gold standard.

It was only six years later that Britain had to abandon the gold standard, Churchill's position was vindicated and that of the Treasury's permanent Secretary Sir Otto Niemeyer, who was thought to be so clever that he had been placed above Keynes in the civil service exams, had been overwhelmed.

Niemeyer was not the only economic administrator who supported the return to the gold standard. Montagu Norman, perhaps the most formidable Governor ever to head the Bank of England, and a large range of establishment academics also did so. Yet it was the homespun common sense of Churchill's observations that was shown to be more intellectually relevant.

This may also be true of Jaswant Singh. For today the opposition to Jaswant Singh's mini-Budget is not from those whom it effects most, namely the voter or the market participant, but from the bureaucracy, both present and past, who are offended by the manner in which the Finance Minister has brought about these 'ad hoc and improper' changes without even careful consideration of the impact it may have on the 'fiscal deficit'.

The charge of impropriety and ad hocism is a curious one. The bulk of the changes wrought by the Finance Minister relate to a reduction in Customs duties and corresponding changes in Excise.

The high level of Customs duties in developing countries particularly in India has been debated by economists for more than thirty years and there has been unanimous agreement ever since Jagdish Bhagwati and Padma Desai wrote their masterpiece in the seventies on India, that Customs duties should be reduced. Suddenly Jaswant Singh does it, but instead of praising him for using an opportunity, the establishment blames him for ad hoc and improper behaviour.

The impropriety they observe is that he has brought in a populist measure just before elections. This attribution of duty reductions to populism is a new piece of analysis, the origins of which have not been revealed. For many years we were told that the authorities could not reduce import duties because the populist mood of the country would view that as favouring foreigners against home-grown Indians.

Suddenly it seems that the populist shoe is on the other foot. Here is a step in the direction of competition and free trade which now is considered a populist measure because it reduces costs for domestic consumers. It is a give away budget though for many years reduction in tariff barriers has been recommended by known economists like Ian Little, Maurice Scott, Tibor Skitovsky, Max Corden, Vijay Joshi and Deepak Lal to name just a few.

The impropriety is that these changes have not been made by the ordinary budget process that is through Bills placed before Parliament. But it is far from clear that trade taxes should be subject to parliamentary scrutiny.

After all, these taxes are nothing more than part and parcel of a general external account policy and closely related to exchange rate determination. If it is permissible for the Governor of RBI to effect exchange rate variations without consulting Parliament, and if Manmohan Singh was allowed to introduce a substantial change in policy by twice devaluing and freeing the exchange rate without issuing even a Press note, it is really slightly absurd to accuse Jaswant Singh of making duty changes when the opportunity is right.

In these matters one should learn to distinguish between implementing well argued policies that have been prevented from execution by one specious argument or another and ad hoc policies that reflect only the arbitrary use of political power. In the case of indirect taxes, the debate has been argued to the point of exhaustion.

In reducing indirect taxes Jaswant Singh has simply carried out a policy recommended by experts but has chosen a moment politically convenient to his party. If this were a common feature of all democratic behaviour, we should have little to complain about our system.

Thus if duty reduction had no other consequences there would be little to worry about. However critics of Jaswant Singh's policy also argue that he has paid scant attention to the revenue impact of his tax reductions on the fiscal deficit.

On this issue I advocate a contrarian's position to economists of such high calibre as Marty Feldstein (Vide L K Jha Memorial lecture RBI 2004) and Richard Sachs (Economic Times, January 14th). It seems to me that the orthodox view on this issue is likely to prove as wrong as orthodoxy proved in Churchill's era, but that argument will have to wait.

sjmulji@aol.com