Kelkar has a parting shot: Reforms should begin at home, in Finance Ministry

On his first morning as a retiree—if people like him are ever allowed to retire—Vijay Kelkar’s thoughts turned this morning t...

On his first morning as a retiree—if people like him are ever allowed to retire—Vijay Kelkar’s thoughts turned this morning to the last report he submitted to the Government. ‘‘Ministry of Finance for the 21st Century’’ made its way to the minister’s table just earlier this week.

Kelkar’s review of the ministry is perhaps the first of its kind in independent India. And, like his earlier reports on taxation and budgetary management, it is stunning in its simplicity. Its message: The ministry was designed for times when the big problems were finding resources to fund Plans and tackling the foreign exchange crunch. Now it must learn to cope with an open economy and a country where policy decisions have far-reaching consequences for markets.

His proposal: The ministry must focus primarily on policy-making and shed the other roles that it has picked up along the way.

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‘‘The ministry should not be a regulatory body. It should not behave like a revenue administrator.

That should be left to the tax boards,’’ he told The Indian Express. ‘‘Take the tax administration out of the ministry and take policy-making out of the boards.’’

As things stand, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC), which come under the ministry, also have policy-making units. But if they want to buy even office space, they must seek approvals from the ministry.

	Kelkar’s message: Don’t spring policy surprises

			• Finance Ministry should focus on policy alone and leave tax administration to the taxation boards. • There should be no ‘‘policy surprises.’’ The ministry must work with a transparent, medium-term perspective. • Ministry must not divorce itself from state finances. • There should be an autonomous body to manage public debt, which should be separated from the monetary authority

Kelkar has suggested a clear division of roles in which the ministry will focus on policy alone while the boards will implement these policies and work within broad budgetary controls. ‘‘The ministry should get away from micro-managing them,’’ he said.

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He also pointed out that currently, the ministry thinks of itself as managing the central government’s finances. But he observes: ‘‘When rating agencies look at our economy, they also look at the finances of the state governments.’’

So he argues that the Finance Ministry should do a lot more to strengthen the states’ finances.

He also wants it to have a ‘‘medium-term perspective.’’ In other words, don’t just plan from one Budget to the next, but make your plans for five or six years and let the economy know what they are. ‘‘We must minimise surprises,’’ he said. ‘‘Entrepreneurs are willing to take commercial risks. Why should we subject them to the avoidable risk of policy surprises?’’

A good example of this strategy would be the Kelkar Task Force report for implementing the Fiscal Responsiblity and Budgetary Management Act.

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This report draws up a road map all the way up to 2008-09 in order to address India’s fiscal problem.

On the theme of minimising surprises, Kelkar’s restructuring report proposes that the ministry should get into the habit of sharing information, so that different players would know more about the rationale and direction of policies. He wants it to strengthen its policy analysis wing by bringing in more experts.

And, when he speaks of reducing the multiple conflicting roles of the Ministry of Finance, he applies the same principles to the management of public debt. In most countries there is consensus that this should be separated from the monetary authority—and he wants India to do the same. ‘‘There should be an autonomous agency to manage public debt,’’ he says.