Downsizing India's behemoth Finance Ministry for Good Governance

1. The Distressing Pillar of Governance - I
Downsizing India’s Ministry of Finance
Shantanu Basu
Finance is the most critical pillar of any government. It follows that the Union Finance
Ministry should be professionally staffed, particularly at the senior management and apex
levels, is alive to the demands of development and is dynamic in reorienting the direction,
pace and quality of government expenditure to sub serve the best public interest; rather than
lead repeated media slugfests advancing gross unlettered opinions and perspectives.
The 13th Finance Commission (FC) raised the level of central financial assistance and
share of Union taxes by over Rs. lakh three crore. The 14th FC, five years later, increased the
existing transfers by a paltry Rs. 1.78 lakh crore. If inflation at a conservative 12% per annum
were compounded and the 13th FC’s formula maintained, this figure ought to have been 76%
higher at around Rs. 5.50 lakh crore or nearly three times more than what the 14th FC granted.
Even among states, the distribution of funds was dictated by elections in major states going to
the hustings in 2015 and 2016.
Not just this, the Govt. of India stopped funding critical developmental schemes that
were benefiting huge populations. All this while, the Finance Ministry blew its trumpet in the
media about how its heart was larger than that of the UPA govt.! Likewise, the buyers of
divested Govt. holdings in central PSUs since May 2014 were, in the largest majority, central
public sector financial institutions. In other words, sale proceeds of CPSUs in one pocket
equalled the divestment revenues of the Govt. of India!
There is much current debate over modifying bank lending interest rates. The bania
camp views rate cuts as the panacea for all our economic woes. Where were they when rates
were low, subsidies squandered or pilfered and loans not repaid of over Rs. 5 lakh crore? The
RBI Governor, on the other, sensibly opposes a rate cut. The investor-friendly Finance
Ministry plays the Benevolent Samaritan, batting on behalf of the bania camp. Cash-rich
CPSUs are not part of rate cut deliberations with private industry when CPSUs account for
10-15% of India’s GDP. Nor is any closure or merger of sick PSUs visible although these eat
away a third of the turnover of the healthier ones every year. Instead there are newer ones
being established with Finance Ministry concurrence but without any attempt to leverage the
strength of healthy CPSUs.
When Indian exports account for a bare fifth of our GDP, the Finance Ministry should
have devoted singular attention to stoking consumer demand in India’s vast market. Yet, this
ought to have been done without ignoring the plight of the fixed-income group that survives
on stable interest rates and have no inflation-indexed dearness allowance/relief to fall back
upon. Given unabated high food inflation, few salary earners or pensioners would invest in a
new car or TV or cooking range, assuming manufacturing picked up with rate cuts. Is this
about good governance or personal differences between India’s top most economic Tsars?
There is nothing to suggest measures to widen the personal tax base from hapless
salary and pension earners while vast swathes of taxable population remain outside the tax
net. Similarly, there is no working evidence of the Govt. of India raising additional out-of-
the-box large fiscal resources, away from fresh or additional taxes, for investing in India to
revive a flagged economy when it has a controlling share in almost every economic activity

2. in India. I wonder how many would invest in gold bonds when there is no lifetime legal
immunity from prosecution for previous non-disclosure.
Even if the interest rate is reduced, there is no assurance that lack of consumer
demand, post-rate cut, will not become yet another reason for NPAs to pile up further. In the
meantime, the unstated premium on bank lending steadily rises from crowding out of private
borrowing by mainly, almost entirely, unproductive government borrowings. Interestingly,
NPAs of PSBs have risen by 12-15% since May, 2014 – obviously PSBs sanctioned more
bad loans under the nose of the Dept. of Financial Services, a constituent of the Union
Finance Ministry. There is no word about punitive measures to prevent the recurrence of such
glaring lapses. Yet the Union Finance Minister, in a press briefing on Aug 24, 2015 said,
“Except currency all other our parameters are on sound footing.” The nation is still searching
for invisible sound parameters!
Take the case of OROP. A relatively easier and cheaper way would have been to raise
the basic pension (all types) to 70% of last pay earned and 50% for family pensioners after 20
years of service for all civilian employees, civil and defence, except for Other Ranks in the
defence services for which the pensionable service should have been 15 years. I believe all
civilian service associations are waiting for OROP’s formal orders to be issued and then
deluge the Apex Court with their petitions, several hundred of them. Why is it that 40%
vacancies in the Govt. of India cannot comprise of trained demobbed servicemen? After all,
defence service and CPMF personnel are already trained and much more disciplined than
what the SSC and UPSC currently recruit.
Why does Govt. of India outsource secretarial, office management, security, I-T and
other duties on the basis of open tenders only? Instead, why can wage rates not be fixed for
superannuated defence and CPMF personnel and Ministries/Depts. mandated to employ these
retired personnel up to 40% of sanctioned posts? What steps have Govt. of India, via DGR
and MHA, taken to form cooperative societies of retired defence and CPMF personnel and
their qualified dependents to render contract services to Govt. of India? Likewise, have any
steps been taken to absorb retired defence personnel in CPMFs, instead of wholesale reliance
on often controversial fresh recruitment? Was it not incumbent upon the Finance Ministry to
suggest these measures?
It is also entirely possible to form a PSU to offer services ranging from road building
to infrastructure O&M, security and sanitation to telecom and I-T, staffed by retired defence
and CPMF personnel and their qualified dependents, supported by competent managers
contracted from non-govt. professionals? Why can the Govt. of India not provide the opening
Rs. 5000-10000 crore share capital to set up this PSU, instead of bankrolling, say, a
terminally sick Air India? Why not provide an interest subsidy of say 5% on the bank
lending rate and sponsor ex-servicemen wishing to set up shop on their own?
Some vignettes from the Union Budget 2015-16 would amplify the Finance
Ministry’s role. Of a total Rs. 13 lakh crore non-Plan expenditure in 2015-16, 33% owes to
interest payment, 17% to repayment of principal and 19% to subsidies – no small wonder that
govt. borrowing is crowding out private capital needs and driving them into high-cost foreign
finance! Sixty per cent of the Govt. of India’s revenue receipts are eaten away by repayment
of debt and interest payment - no wonder GoI is fast sinking! The postal deficit of approx. Rs.
6600 crore is best met by reverting to the former concessionaire model with postal
employees’ cooperatives taking over the business for a share of the profits. Rs. 10852 crore is
the budget provision, mainly for constructing/acquiring govt. buildings.

3. About Rs. 1000 crore is provided for CBEC and CBDT’s office and residential
buildings and Rs. 700 crore for CPWD buildings oblivious of their huge capital O&M costs.
Interest Subvention for providing short term credit to farmers gets Rs. 13000 crore. Yet there
is no word on the identity and receipt of and by actual beneficiaries. Transfer to the newly
constituted Social and Infrastructure Development Fund is a token provision for Rs. one lakh,
while the Finance Ministry presumably and endlessly pontificate on further accretions.
Simultaneously, subsidy for operation of Haj Charters of Rs. 500 crore clearly proves
the State’s malefic intent in promoting communal disharmony for the vote. Barebones foreign
assistance to other countries/institutions of Rs. 9735.82 crore in a volatile neighbourhood,
compared to China’s recent $47 bn. infrastructure push to Pakistan. The Finance Ministry
also provides and whopping Rs. 52000 crore for central police and investigation is when law
and order is a state subject.
In addition, the Govt. of India’s Plan budget document states “In comparison to
capital spending of Rs. 192378 crore in RE 2014-15, the capital spending will be Rs. 241431
crore in 2015-16. This will be a growth of 25.5 per cent”. Lofty claims when savings are most
often 90%+ and re-appropriated to meet burgeoning non-Plan costs by the Finance Ministry
(that alone has this authority) and patently by false accounting entries and surreptitious
transfers outside the government account to book expenditure without actual physical
progress. And part of these moneys find their way to unauthorized purchase or hiring of
Toyota Corollas, Honda City, Maruti Ciaz, myriad more luxury vehicles for the bada baboos
again under the nose of the Union Finance Ministry.
The author is a senior public policy and governance commentator

4. The Distressing Pillar of Governance - II
Downsizing India’s Ministry of Finance
Shantanu Basu
Why does the Union Finance Ministry behave the way it is now? For one, it has
metamorphosed into an unmanageable and directionless behemoth. The maze of financial
rules and regulations that makes the Finance Ministry the last word in fiscal wisdom militates
against operational autonomy of the spending units. Excessive centralization, ineffectual,
indeed politically selective, monitoring of giant expenditure, too big a jurisdictional remit,
this Ministry is the first one in the Govt. of India that needs to be severely downsized so that
provisioning and expenditure are separated in line with the constitutional separation of
financial powers.
Senior officers of common prudence are already there in all Ministries, including
financial advisers and Chief Controllers of Accounts, who adequately represent the Finance
Ministry in all Ministries & Depts. of the Govt. of India. Further, Ministries cannot spend
more than what they have been provisioned. They have to follow well-established rules of
expenditure too. Plus they have the 3Cs, viz. CVC, CBI and CAG, courts, RTI petitions,
media publicity and Parliamentary committees, etc. The financial rules authored by the
Finance Ministry, abetted by a frog-in-the-well CAG, are created upon a Machiavellian
precept of all men being evil. They rule by routine than by exception and portray the Finance
Ministry as the supreme keeper of the government’s morals. Yet the rules that this Ministry
promulgates often border on the ridiculous.
Why it is that tendering and public private partnership remain cash cows? Why must
it issue mundane orders fixing rates for working lunches for inter-departmental meetings?
Why does it overlook the fact that all Ministries routinely hire private cars instead of licensed
tourist taxis whose operating costs are substantially higher? Why must delegation of powers
to spending Ministries remain unrevised for years together and mostly notional raises after
several years?
If a spending Ministry is allotted a budget, why does the Finance Ministry not allow
that Ministry to assume full ownership over its expenditure and hold it to account when it
prematurely runs out of funds? Indeed, the Union Finance Ministry has become the
fountainhead for rampant delays in strategic contracts, bulk procurement, staffing, myriad
more. It is therefore not without reason that serious doubts have often been raised in varied
forums about the real intent of this Ministry.
The Aid, Audit & Accounts, Bilateral Cooperation, Multilateral Institutions and
Multilateral Relations Division of the Dept. of Economic Affairs should be integrated with
the Economic Diplomacy Division of the Ministry of External Affairs. Why should a large
chunk of Dept. of Economic Affairs not be part of MEA? Likewise, Dept. of Expenditure is
already largely decentralized to Ministries & Depts. Then why have this behemoth Dept.?
What is the role of the Dept. of Financial Services when the RBI and IRDA regulate the
banking and insurance sectors and the entire private sector is beyond the control of this dept.?
Why do PSBs or PSIs and govt. finance companies need this dept. other than for
dispensing informal fiscal patronage to third parties and appointing compliant candidates as
top executives in PSBs adding to NPAs and failing to recover NPAs? Rs. 70000-8000 crore
of developmental moneys for recapping PSBs in lieu of NPAs is hardly a contribution to be

5. proud of! Why can this dept. therefore not be merged with Revenue for enforcing better fiscal
discipline and board level appointments delegated to Dept. of Personnel? Likewise, why not
add the Ministry of Corporate Affairs to Revenue and bring all the anti-economic offences
agencies under Revenue when the Govt. of India is severely cash strapped and the private
sector is no paragon of virtue?
For its abysmal performance, the Finance Ministry boasts of 54 officers of the rank of
Jt. Secretary and above – a wage cost of about Rs. 32.50 crore per annum (inclusive of
lifetime pension liability, New Moti Bagh housing at current market rent, full-time staff
vehicle, other perks, etc.) plus many times more for their supporting personnel. Why would
the Finance Ministry ever suggest obvious rationalisation of fellow Ministries?
Why not merge the export promotion functions of the Commerce Ministry to the
MEA’s Economic Diplomacy Wing? And why not transfer its regulatory and licensing
functions to the respective Ministries, e.g. agriculture? Similarly, why can Social Welfare,
Sports & Youth Affairs, Women & Child Welfare, Panchayati Raj and Rural Development
not integrate into a single Ministry? Why not bring all CPSUs under an underworked, but
fully staffed, Dept. of Industrial Policy & Promotion (DIPP) instead of spreading CPSU
largesse to all Ministries?
The near total lack of transparency in the Govt. of India’s accounts remains
unaddressed, even when this needs no constitutional amendment or fresh legislation. The
Finance Ministry has raised huge resources by sale of spectrum and coal mining licenses, yet
only the spectrum fees find mention in the accounts for 2014-15. This Ministry raised taxes
before Budget 2015 on several items of mass consumption, a continuing education cess,
raised service tax to 14%, giant central excise mopping from an equally giant margin between
rapidly declining oil prices and near stagnant sale price of POL, and much more. At the same
time, expenditure on non-Plan expenditure jumped over 10% in April, 2015 from April,
2014. How and where have these gargantuan collections been utilized? Needless to add, no
convincing replies are forthcoming from this Ministry.
What is even more worrisome is the fact of there being no cap of the maximum rate of
GST, whenever it is approved for promulgation. Political compromise has caused the three
largest tax earners, viz. tobacco, liquor and POL to remain outside the GST net. The
consumer-centric GST also raises concerns in manufacturing states that would see a
downturn in their revenues without adequate compensation. Yet the Finance Ministry
strangely advances no media bytes about the cap on the maximum rate of GST and
multiplicative effect of the three excluded items plus another 1-2% for manufacturing states’
compensation. If the current rate of service tax of 14% is adopted as a base, the add-ons may
add another 10-15%, making for a probable effective rate of 25-29%, making it one of the
most regressive taxation systems in the world.
Notwithstanding its critical role in India’s development, the Union Finance Ministry
has, over the decades, and most so since May 2014, come to symbolize the absolute freeze in
governance. It is high time the Ministry were drastically downsized to provisioning of the
annual budget with expenditure being left to the spending Ministries. The Union Finance
Ministry has become the principal tool of political and economic subversion set on an
arrogant collision course with states that deliver 95% of governance to Indians. This militates
against development and progress. Re-delegation of its powers to spending units will aid
development and enable greater fiscal responsibility. After all the Union Finance Ministry is

6. not and must not be the Govt. of India’s supreme instrumentality of common sense and fiscal
prudence and keeper of the government’s morals!
Honesty in governance and the ability to comprehend the nation’s problems combined
with the will to perform will certainly command unprecented premium and determine results
of the national hustings in 2019. It would also determine the handover of an impatiently
expectant nation to undeserving, unstable and brazenly corrupt and ineffectual coalitions.
Historical extinction stares non-performers in the face. In its present shape and patronizing
attitude, India’s Finance Ministry is rapidly becoming the NDA government’s Achilles’s
heel. Forewarned is forearmed!
For now, policy and performance paralysis remain static from UPA to NDA.
The author is a senior public policy and governance commentator