Ongoing Debate Over Freebies Lacks Substance, Says Former Finance Secretary Subhash Garg

My objective in writing this book was to write in a manner which presents facts and policy making credibly and realistically. By doing this, I think you can communicate without bringing up your biases, that's what my attempt was. And so I chose this format of describing things as they happened, positions people took and arguments they used to provide a compelling narrative. 

The second reason is that I've always felt this deficiency in our system that we don't document things very well. There is no institutional memory; officers come to serve for three, four or five years and then they go back to states and their departments. I think we are sort of committing a grave error for posterity by not recording the background and what happened while making major decisions. I thought I would fill that gap by writing this book. I don't know whether this book breaks any new ground, but I hope it is followed by many more such books being written. 

I think the socialist mindset post-independence evolved into a form of communism, leading to extensive government ownership and control of productive assets. Over time, a significant increase in the public sector occurred, with politicians and civil servants heavily interested in its continuance and survival.

Despite some privatisation efforts, the deeply ingrained government psyche still favours the public sector. Since 1991, certain sectors witnessed emergence and dominance of private sector , while the public sector diminished. However, privatisation process has faced immense challenges and a lot of opportunities still remain. The public sector banks, once perceived as a job generator, are now inefficient and lacks in even job creation compared to private sector banks. Owing to several factors, what I think will happen in India is that the public sector will gradually shrink over the next few decades, unless there is a big change in mindset which leads to rapid strategic divestment.

Demonetisation in retrospect seems like a misadventure though with limited harm or gain. GST, a necessary reform, has been streamlined over the years, addressing initial concerns. Another significant reform, the Insolvency and Bankruptcy Code, initially performed well but now faces challenges that need better handling by the institutions. Overall, attributing specific growth impacts to these reforms is difficult. They should be seen as necessary changes that will contribute to growth in the short or long run, with their effects not easily quantifiable.

I typically avoid discussing politicians, but this topic is crucial from fiscal policy making. Prime Minister Modi, hailing from a business-oriented Gujarat, first prioritised business-driven wealth creation over traditional welfare approaches. His discomfort with populist policies, visible in the first term, reflected Gujarat's focus on business rather than state handouts. However, India's poverty and diverse redistribution needs contrast with Gujarat's model.

Importantly, there was a shift in his approach too. PM Modi recognised the indispensability of cash handouts for India. Programmes like PM Kisan Samman Nidhi, providing Rs 6000 to farmer families, a kind of  classic freebie, emerged even before the 2019 elections. The ongoing debate on freebies lacks substance, with both BJP-ruled and opposition states engaging in such competitive announcements without a coherent policy or philosophy guiding  them. The 15th Finance Commission struggled to quantify the impact of populism on government expenditures, revealing the challenge of assessing such measures. In essence, the debate around freebies today appears artificial, lacking a clear stance or unified philosophy for and against its use.

When discussing policy, it's crucial to address the problems we aim to solve. In India, the formal system for political donations, as per the Companies Act and income tax, existed on paper but lacked acceptability. Nearly 95% of donations came in cash. The  corporates also used their black/white money to provide political donations in case through questionable shell companies/routes.

To find a solution to the cash donation problem and to enhance transparency, the government introduced electoral bonds, a solution presented by Arun Jaitley and enshrined in amendments to the RBI Act and Income Tax Acts. The system, now operational, has seen around Rs 15,000 crores in electronic donations. While companies don't disclose names of recipient parties, they account for the funds spent on electoral bonds in their books. Despite the system in general favouring the ruling party at the Centre, anonymity element introduced in the electoral bonds encourages the donors to provide political donation to opposition parties as well, which is reflected in the data. This practical solution has significantly improved sourcing of political donation from legit resources and expenditure thereof by political parties.

When appointing eminent economists like Raghuram Rajan, Arvind Subramanian, or Viral Acharya, there is a double-edged dynamic playing for the government. While these experts bring innovative and non-biased solutions, their independence may sometimes clash with the government's preferences and sometimes the experts might get carried away without regard to the facts of life. Instances like the February 12 circular on non-performing assets and the economic capital framework represented this excess and led to disagreements on account of real lack of consultation.

Friction is natural when experts assert independence for a wrong cause, as seen in various policy areas, not just electoral bonds. In the second term, there's a noticeable absence of such independent-minded experts in key roles, suggesting a shift towards individuals less likely to take a life different from that of government. It's unclear if this shift is a deliberate policy, but the evidence points to a preference of government for individuals more aligned with the government's views. This trend extends beyond economists to wider civil services and other regulatory bodies. While differences in perspectives are natural, the government appears to have leaned towards individuals less likely to assert independence in the second term.

In a committee, decisions are made based on the majority's viewpoint, and dissent is allowed as a time honoured convention. In the case of the dissent note on surplus sharing by the RBI, the Finance Minister, Nirmala Sitharaman, initially seemed supportive of my  dissenting perspective. However, later she wanted me not to file the dissent note, which I did not agree to. Consequently, I  was transferred and the dissent not was eventually removed from the final report .

Upon returning from Japan, Sitharaman changed her stance, insisting that the dissent note be withdrawn. I attempted to persuade her to keep the dissenting viewpoint, emphasising its importance. I never got to know what made her change her mind so I haven’t written about this aspect in my otherwise detailed account of  the episode in book.

The primary point of contention with RBI was the proposed increase in cash reserves from then existing 4 per cent. I found this and a few other matters intellectually unacceptable. Obviously, I was not able to convince the minister on the issue or may be she had decided not to see reason or my point of view.  

The idea of counterfactuals is mostly imaginary, and it's always challenging to determine what might have happened in a different scenario. I recognised at the time that the government wasn't willing to allow me to go out of the economic affairs.  In a way, I thought while the RBI job is prestigious, the final policymaking always lies with the government, offering a broader scope for contribution. Considering these factors, I concluded that the role wasn't the right fit for me at that time.