Defining a 'good' finance minister

Back in the mid-1990s, when liberalisation was in its infancy, Sudhir Mulji, economist and businessman, writer, savant and saviour, would insist that only economists should be made finance ministers.  Finance minister Manmohan Singh had made way in 1996 for a lawyer called P Chidambaram. Mr Mulji was not pleased.

In the event, Mr Chidambaram brought down income taxes, cut import duties, and appointed Bimal Jalan as RBI governor who furthered the cause of liberalising the financial markets and managed the politicians with great finesse. Overall, although the first Chidambaram term lasted only for about two years, it was a good time for the economy.

When I pointed this out to Mr Mulji, he said these were all the ideas of economists which Mr Chidambaram had implemented. One could hardly argue with that.But the question remains: do you need to be an economist in order to be a good finance minister? Indeed, how do you tell a good finance minister from a bad one?

Good FM?

The world record in this regard is instructive. It shows that all finance ministers who cut taxes are ‘good’ and all who raise them are ‘bad’. Absolutely nothing else matters, rightly or wrongly.It also shows that policy is made by the head of the government and finance ministers are merely the implementers. Manmohan Singh, as we can see in the books by Sanjaya Baru and Jairam Ramesh, was no exception to this rule. (But he didn’t mind when people gave him credit for policy change, which is what perhaps misled Mr Mulji. In any case he had cased to be an economist long ago).

The record shows another thing: that when prime ministers take over the finance ministry, disaster is not far behind. Jawaharlal Nehru, Indira Gandhi, and Rajiv Gandhi all made a massive policy mess that had lasting consequences. One must hope that Narendra Modi will resist the temptation. Demonetisation was bad enough.

Cutting taxes aside, the real challenge for finance ministers lies in how well they manage the economy when the till is empty. There have been three finance ministers who have had to deal with this problem: T T Krishnamachari in the mid-1960w after the 1962 war with China; Sachin Chaudhuri during 1966-69 after two wars with Pakistan and two successive droughts; Madhu Dandavate in 1990 and Manmohan Singh in 1991 after Rajiv Gandhi had comprehensively raided the exchequer during 1987-89.

Common sense and consequence

Now here’s the thing: on two of these three occasions the rupee had to be devalued, once by 36 per cent and once by 24 per cent. This is a major policy option open to the Modi government as well. 

The finance minister doesn’t have to be an economist  for recommending this. Simple common sense will do. 

Good finance ministers also don’t interfere with the Reserve Bank of India (RBI). They trust it to manage the financial sector better than their ministry can because, unlike the ministry, the RBI is manned by professionals who pray to a different god.

Last but not least, Mr Modi is very lucky that this has happened at the start of his second term. The political consequences of a deflated economy are four years away and he must do what the British did after the 2008 crisis: go on a fiscal fast for three years. 

He has two templates to choose from: 1966-69 and 1991-94. He can ask someone to tell him about the recovery that followed. For the new finance minister, this is the real challenge, of convincing the prime minister to postpone populism until 2023.