A Ministry of Finance for 21st century: Restructuring for future challenges

Finance ministries worldwide drive economic reforms. It's time to restructure India's to meet the challenges of tomorrow

Over 20 years ago, then finance minister Jaswant Singh formed a committee led by Vijay Kelkar, resulting in a report titled “A Ministry of Finance (MoF) for the 21st Century.” That report remains a key starting point for thinking about building a sound MoF.

 

Finance is the brain of the economy, and the MoF is the brain of the Union government. The researcher Philipp Krause has described the emergence of state capability in the MoF as rising from a more transactional role (the plumbing and accounting of moving money on the expenditure side) to a more policy role.

 

A sophisticated MoF nurtures the macroeconomic and financial institutional arrangements that constitute the commanding heights of the economy, and thus enables private and foreign investment. It develops a situational awareness of the barriers to growth, and uses the budget function to negotiate reforms with all ministries.

 

The MoF today consists of six departments, namely the departments of economic affairs (DEA), revenue, expenditure, financial services , investment & public asset management, and public enterprises. It is interesting to compare this structure with the alternative structure, such as that of the Ministry of Home Affairs or the Ministry of External Affairs, where there is no intra-ministry demarcation into multiple departments.

 

Like the home secretary and the foreign secretary, the Government of India (GoI) has a finance secretary. The finance secretary is, however, a pale shadow of the other secretaries, namely the foreign secretary, and an even paler shadow of the home secretary. The home and foreign secretaries are the heads of their departments, and all senior officers in these departments report to them. The coordination and resolution of conflicting views of different units within the department happens organically in this hierarchy at the level of the secretary, leaving the minister with enough time to focus on larger policy and strategic issues.

 

At the MoF, none of the departmental secretaries reports to the finance secretary, and much of the heavy lifting on coordination of even operational issues gets pushed up to the level of the finance minister. The finance secretary, in reality, is just a designation and, at most, primus inter pares, with no authority over other departments (other than the one she or he heads as secretary). As a consequence, the MoF does not always speak with one voice.

 

There are many consequences of this structure. The report comprehensively deals with all of them and suggests a unified design, namely a single department with 16 divisions. A full discussion of the recommendations needs time and column space. This column will focus on only one aspect of the report — namely, financial sector policy.

 

In the financial sector, academic and market communities, there is now an acknowledgement that separation of banking, insurance, and pensions from the DEA in 2007-08, has not worked well and there needs to be a unification of thinking on financial policy.

 

The MoF today is surrounded by a constellation of regulatory agencies, such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority of India (Irdai), the Pension Fund Regulatory and Development Authority (PFRDA), the International Financial Services Centre Authority (IFSCA), and many others. Each has its specific role, but there are overlaps and gaps, requiring a body like the Financial Sector Development Council (FSDC) to act as a coordinating and resolution mechanism. This, once again, involves the highest office — that of the finance minister.

 

While the unified regulatory agency recommended by various expert bodies continues to face opposition (both from a conceptual viewpoint and from entrenched interests), there is a consensus that we need unification at the level of principles of regulation so as to achieve better outcomes for market participants, market infrastructure institutions, and the consumers. This would also avoid gaps, overlaps and outright conflicts at the level of regulators on policy issues and help in creating truly national policies rather than sectoral ones.

 

Globally, the “same risk, same regulation” principle is increasingly the norm. However, we remain bogged down by sectoral loyalties, as evident in the following examples: The RBI’s regulation of alternate investment funds, Sebi’s treatment of mutual fund investments in AT1 bonds, the regulation and operation of credit rating agencies, the regulation of pension products by Sebi, Irdai, and PFRDA, and the differing frameworks for regulation-making and review by different regulators.

 

A sector-agnostic financial sector policy may, therefore, evolve more readily if the policy unit in the MoF operates without sectoral loyalties or turfs to protect. Sector-specific regulation is anathema to global standard-setting bodies. A unified policymaking unit in the MoF would be better aligned with this global reality.

 

The biggest reform achievements of the present government — inflation targeting, the Goods and Services Tax (GST), and the Insolvency & Bankruptcy Code (IBC) — emerged from the MoF. This is in keeping with the past trend. The Securities Appellate Tribunal, rolling settlement, demutualisation of exchanges, the National Pension System, the Monetary Policy Committee, and the IBC were all spearheaded by policy teams in the DEA. Senior readers will recall that many of these fundamental financial sector reforms occurred not because of regulators, but often despite their turf war-based resistance.

 

It is in this larger context that we should view the recent staffing changes at the MoF. Over the past four months, there has been a highly unusual movement of four secretaries in the Department of Revenue (DoR), including during the crucial annual Budget time. In terms of turnover, this is not entirely an aberration. Since 2014, we have had seven secretaries in charge of the DEA and eight secretaries in charge of the DoR.

 

In parallel, the current secretary of the DEA will be the first one in recent decades (after Montek Singh Ahluwalia) to complete four years in the role. We have also seen some noteworthy bureaucratic appointments, with a finance secretary becoming the cabinet secretary, another becoming the chairperson of Sebi, and a third secretary from the MoF assuming the role of governor of the RBI

 

We need to do much more on building the MoF as an institution by addressing both the issue of tenure and structure.

 

The author is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant