The joke apart, even the argument offered as an explanation for the proposed move is quite fallacious. Abolishing the finance ministry will not solve problems about speedier reforms. On the contrary, it might create practical problems like who will present the budget and who will take care of expenditure slippages and BoP problems.
There is, however, a grain of truth in the spirit of the argument. Since the reforms began in 1991, the finance ministry has taken very few measures to reform itself. True, it gave up discretionary controls on fresh capital issues by companies. It abolished the office of the controller of capital issues and transferred its functions and powers to Sebi. With the setting up of an insurance regulatory authority, the finance ministry will hopefully divest itself of the powers to administer the insurance companies. But apart from these two measures, the finance ministry has not taken any major step to come closer to the spirit of reforms, which broadly means substitution of a discretionary regime with a transparent and rule-based regulatory system. The case of the Tariff Commission is too well-known. In his first budget, Manmohan Singh had proposed the setting up of a statutorily empowered Tariff Commission. The proposal created a major consternation in the finance ministry, particularly in the department of
revenue, which feared that with the setting up of the Commission, the primary job of fixing duties would be taken away from it. No wonder, the proposal was soon given a quiet burial on the ground that the economy was not ready for a Tariff Commission. And now that the Tariff Commission has been revived and set up by the UF government, the finance ministry has made sure that it is not vested with any statutory powers.
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Take the financial sector as an example. Technically, all the term-lending financial institutions (FIs) and banks are regulated and controlled by the RBI. But the finance ministry continues to have a good deal of influence over all their functions and policies. Ask any chairman or a senior director of an FI or a bank and he will tell you how difficult it is for him to ignore the polite requests made by the ministry. Even today, appointments of chief executives of all banks and FIs are made in consultation with the finance ministry. You might argue that if the government is the majority shareholder in most of these institutions, why should it not reserve the right to have its say in the choice of their chief executives? But then, the logic of reforms suggests that all decision-making processes be transparent and guideline-based. Why cant the finance ministry set up an apex body comprising senior experts and professionals, and vest it with the responsibility of selecting chief executives of banks and FIs? Such
a body would ensure that the political leadership or a bunch of senior bureaucrats do not influence decisions on key appointments. This would also mean true reforms.
A couple of years ago, the government decided to extend deemed exports benefit to all supplies made to core sector projects. Guess how the decision was implemented. The finance ministry took upon itself the responsibility of notifying the specific core sector projects, from time to time, which would qualify for deemed export benefits. This gave rise to lobbying by various companies to declare a certain core sector project as eligible for the benefit. Why didnt the finance ministry bring out a comprehensive definition of a core sector project and declare that all projects satisfying conditions in that definition would be eligible for deemed export benefit? Once again, the finance ministry decided that it should retain some discretionary powers, even though it might go against the spirit of reforms.
The latest instance pertains to the automobile industry. The new policy for import of components stipulates well-defined levels of indigenisation to be achieved by manufacturers. One may quarrel with the logic of fixing such levels and the manner in which these are sought to be monitored. But at least there is no scope for discretion at the stage of implementing such a policy.
What the finance ministry, however, did was a truly retrograde step. The revenue department issued a notification that listed some auto components and stated that if a company was manufacturing some of the listed components indigenously, it could import the rest by paying a duty of 35 per cent.
The move was questionable on two scores. One, it allowed import of auto components at a lower duty without any reference to the indigenisation level achieved. This virtually rolled back the new policy under which automobile units below the stipulated level of indigenisation could import components only at 110 per cent duty. Obviously, most companies sought recourse to the notification and began imports, caring little for the policy. Two, the notification introduced an element of discretion in implementation of the policy.
Now, who would define what is meant by some components being manufactured indigenously ? Why couldnt the finance ministry say that the facility of importing the listed items as components would be granted when an X percentage of components was manufactured indigenously? That would have at least ensured that there was no discretion used in deciding on granting a facility. No system can be reformed unless discretion in imp-lementing policies is eliminated.