Pranab as FM: Remembering how he managed controversies, even created some

Pranab Mukherjee
Only five finance ministers of India have had the privilege of holding that prized portfolio twice in their career in different stints. Pranab Mukherjee was one of them. But there was a big difference.


The gap between the two tenures of all other finance ministers – T T Krishnamachari, Morarji Desai, Yashwant Sinha and P Chidambaram – ranged between four years and seven years.


For Pranab Mukherjee, the gap was 25 years. That long gap is testimony as much to his longevity and utility as a politician as to his ability to survive under different Congress regimes.


Indira Gandhi was the prime minister when Mukherjee first became the finance minister in 1982, a tenure that lasted till the end of 1984, coinciding with the tragic assassination of Gandhi a couple of months before on October 31 that year.


Two-and-a-half decades later, Mukherjee became the finance minister once again for a period of about three years till June 2012. That was when he stepped down as the finance minister to contest the presidential election, which he won to become the 13th President of India from July 2012.


In his second tenure as the finance minister, Mukherjee’s prime minister was Manmohan Singh, a man he had worked with many years ago, but with a different reporting relationship. In 1982, Singh was the governor of the Reserve Bank of India and would report to Mukherjee, who was then the finance minister in his first tenure.


There are few instances of such a dramatic role reversal.


The performance of the Indian economy during the two tenures of Mukherjee as finance minister was hardly spectacular. Neither did Mukherjee significantly raise the performance of the economy, nor did he let it go down precipitously.  But his stewardship of the economy will stand out as much for the manner in which he managed controversies as for creating quite a few of them.


Mukherjee’s induction into the corner room of North Block, headquarters of the finance ministry, on January 15, 1982 was preceded by an economic crisis, which also led to a political controversy. The government had obtained a $5.8 billion loan from the International Monetary Fund (IMF) in November 1981 to manage its balance of payments situation. When Mukherjee became the finance minister, only a month and a half was left for him to present his first Budget to Parliament. Mukherjee rose to the occasion and presented a Budget speech that made a stout defence of India’s decision to seek the IMF loan. The speech lasted for more than an hour and a half, unusually long in those days. Gandhi was heard commenting: “The shortest finance minister has delivered the longest Budget speech.”


In his first stint, Mukherjee managed the political fall-out of India receiving an IMF loan quite adroitly. That the Indian economy began turning around helped him. Thus, when he presented his third Budget in February 1984, Mukherjee actually made the grand announcement that the government did not need the final installment of the IMF loan as the economy had recovered from its balance of payments crisis and the international body could divert the unused portion of the loan sanctioned for India to countries that may need such assistance.


He also opened doors to non-resident Indians or NRIs to invest in the stock markets and in shares of already listed companies in India. This became controversial as the permission led to the infamous bid mounted by London-based NRI, Swraj Paul, to take over Escorts and DCM. Rajiv Gandhi, at that time a member of Parliament from Amethi, welcomed NRI investments, but suggested that limits should be fixed on their purchase of shares in Indian companies. Eventually, limits on NRI investments in shares of Indian companies were imposed to ensure that owners of Indian companies did not feel threatened.


The NRI investment issue also gave rise to a difference of opinion between Mukherjee and Manmohan Singh, who was then the RBI governor. The government had overruled the RBI, which had objected to the move on relaxing NRI investment rules. Singh later admitted to a build-up of tension between the RBI and the government on that issue.


Mukherjee had crossed swords with Singh one more time. This was in 1983 when the government wanted to allow the controversial and poorly regulated foreign bank, the Bank of Credit and Commerce International (BCCI), to open a branch in Bombay. But Singh as the RBI Governor opposed the move. The government then issued directives to the RBI to allow BCCI to open a branch in Bombay. Singh was upset. But the government did not stop at that. Its Cabinet decided to deprive the RBI of its powers to grant licences to banks. In response, Singh sent in his resignation to Mukherjee and to Indira Gandhi. After some consultation and rethinking, the government retracted its steps and a crisis was averted.

Mukherjee kicked up yet another storm of protests when he did not accept the recommendations of the Eighth Finance Commission for the entire period of five years, but only for one year. He had his own reasons, but that decision to implement only a few of the Commission’s recommendations for 1984-85, leaving the rest to be implemented in the remaining four years, soured the relations between the Centre and the states.


Mukherjee’s return to North Block after 25 years was also in the backdrop of an economic crisis, growth plummeting and the problem of twin deficits (fiscal and current account) rearing its ugly head.


His second term as finance minister will be remembered mostly for his controversial decision to make a retrospective amendment in the direct taxes law that would allow the government to tax overseas companies on their share transactions involving companies with substantial and operating assets within the Indian jurisdiction. The retrospective amendment in the law became necessary after the foreign owners of Hutchison Essar Limited, a mobile phone company operating in India, sold their controlling stake to Vodafone of the UK at a profit, but the new owners challenged the tax notice served on them and got a favourable verdict from the Supreme Court.


Many of his ministerial colleagues and even the prime minister were wary of the adverse impact such a retrospective amendment to the law would have on the country’s climate for foreign investment. However, Mukherjee stuck to his ground and went ahead with the retrospective amendment to the relevant tax laws, which also came to be known as the Vodafone tax. Mukherjee believed that the successive governments retaining the retrospective amendment was a vindication of his stance in 2012.


As during his first stint, Mukherjee’s second tenure as finance minister was marked by his difference of views with the RBI Governor, D. Subbarao on the question of the role and functions of the RBI in the newly created Financial Sector Development Council.


Mukherjee initiated many other moves like the setting up of the committee on financial sector reforms, headed by Justice Srikrishna and preparing the ground for a public debt management office outside the ambit of the RBI. But during his tenure these initiatives made slow progress. Success eluded him even in his other two tax reform measures - the Direct Taxes Code and the Goods and Services Tax. He laid the ground for implementing reforms in those areas, but in the end fell short of achieving those goals during his tenure.

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