Modern ministries

Many hold the view, including this newspaper, that before Prime Minister Manmohan Singh finally gets down to recasting his Cabinet, a good idea would be to see which ministries are really needed.

Why, for instance, do you need a ministry of steel in a free market (you don’t have a ministry of mobile phones, do you?)—surely it can’t be just to look after the needs of a SAIL, which has lost much of its relevance given the growth in private sector steel production (see “How to Shuffle”, October 14).

A parallel exercise Singh needs to do is to reorganise the ministries themselves, to make them more in sync with today’s needs, and to remove the conflict of interest inherent in the current format—the telecom ministry’s responsibility for formulating telecom policy while also being responsible for the functioning of BSNL (and earlier VSNL) has ensured, for instance, that the sector has never been fully opened up whenever the interests of these PSUs are involved.

A good place to begin is the ministry of finance, especially since this is seen as the lynchpin around which all economic change revolves. Today, the ministry’s structure is quite antithetical to reforms, and so, if reforms happen this is not a result of the natural functioning of the ministry, but a result of, say, firm directions from the finance minister—naturally, there is a limit to how much the minister can push. Take tax policy.

Under the current dispensation, the two units in charge of coming up with recommendations on taxes are the Tax Policy and Legislation (TPL) unit, located in the Central Board of Direct Taxes (CBDT), and the Tax Research Unit (TRU), located in the Central Board of Excise and Customs (CBEC).

Since both the CBEC and the CBDT are concerned with collecting as much tax as possible, surely their recommendations will be different from those of, say, the economic division of the finance ministry, which would look at larger issues of macro economy and business cycles?

There is, for instance, little question of a TRU being in favour of lowering customs duties whereas the economic division would recognise that all high duties do is to distort domestic markets.

In which case, there is a good case for separating the tax collection arm of the finance ministry from the tax policy units—that is, bring the TPL and the TRU under the economic division of the ministry.

In the US, the Internal Revenue Service, which is the equivalent of our CBEC/CBDT, is independent of the Treasury, and Singapore’s tax collection agency even has a payroll structure which is more incentive-based and quite separate from that of the rest of the government.

Also, while it is obvious that all reform attempts will fail if the states don’t fall in line, and that it is the combined fiscal deficit rather than that of the Centre alone which really matters, the current structure in the ministry has no one looking at the states in a pro-active manner, trying to harmonise various state-level taxes with central ones.

Indeed, this is why VAT never took off for so many years as the finance ministry left this to the states. Sure VAT has happened eventually, but that’s after a lot of political intervention—what is needed, instead, is an organisational set-up that deals with such matters on a daily basis.

As for whether the Constitution allows the Centre to interfere, the examples of the debt and interest rate swaps and the medium-term fiscal reforms programme (MTFRP) clearly show there is enough leeway in the system for this to take place.

It is hard to believe, but the finance ministry has not one division which alone does treasury management of the country’s huge foreign debt. Ideas like the pre-payment of expensive foreign debt or the buyback of illiquid government debt that have happened in the last two years were ad hoc initiatives of senior secretaries in the finance ministry, more a matter of chance than the result of a system designed to routinely focus on such matters 24x7.

Another problem area is the current structure where the RBI is in charge of both monetary policy and also of managing government debt since this creates a serious conflict of interest—as part of the latter duty, the RBI wants to keep interest rates low while, as part of the former duty, it may want to raise interest rates. Even developing countries like China have moved managing of government debt away from the purview of the central bank.

Forget about such reorganisation, the current system retains completely redundant departments in the ministry. So, the Enforcement Directorate continues to be with the ministry long after FERA has been dismantled (FEMA, the replacement for FERA, comes under the RBI).

Similarly, there is no move to separate the indirect tax tribunal, the Cestat, despite the fact that there is no justification for having an appellate tribunal under the very ministry whose rulings are being challenged. A Cabinet reshuffle without going through this kind of exercise would be a pity.