Former President Pranab Mukherjee’s eventful tenure as Finance Minister was dotted by navigating the Indian economy in the aftermath of the global financial crisis through massive doses of fiscal stimulus and introduction of “retrospective” tax laws that faced intense criticism.
During the span of his career in the Congress and UPA regimes, Mukherjee handled several important economic portfolios of finance, commerce, shipping and industries ministries.
The introduction of General Anti-Avoidance Rules were aimed at curbing deals that were structured to avoid payment of taxes in India. But the retrospective amendment of this direct tax law and its other provisions invited the backlash of foreign investment fraternity. This was mainly to prevent multinational companies getting into offshore share transactions to domestic assets without paying capital gains tax in India, particularly Vodafone Group Plc’s acquisition of Hutchison Whampoa Ltd’s Indian telecom assets.
The economy was on a roller coaster after the collapse of global investment bank Lehman Brothers in September 2008, bringing a major financial crisis across the globe and engulfing the Indian financial sector as well. Mukherjee, who stepped in in January 2009 to steer an economy recuperating from such a crisis, administered multiple doses of fiscal stimulus, which helped in boosting growth in the short-term but also led to deterioration in the fiscal position of the central government.
Even as Mukherjee is no more, this debate of fiscal expansion to support the economy is still alive in the aftermath of Covid-19 pandemic, which has led to a major contraction in the economy and threatens to unravel weak businesses across the board.
The Union Budget for 2008–09, presented ahead of the collapse of Lehman Brothers, had penciled in a fiscal deficit of 2.5 per cent. However, in the following year’s budget, the fiscal deficit ballooned to as high as 6 per cent of GDP. Many economists argued that this stoked inflation and contained government’s spending capacity and fiscal arithmetic for many years — resulting in Indian economy being labelled as a fragile economy on the brink of a ratings downgrade to a junk status. While India could avoid a junk status, growth started to taper off.
In 2010, a crisis erupted in the regulatory architecture of Unit Linked Insurance Plans (ULIPs) — a hybrid product that offered life insurance cover along with benefits of investment in mutual funds. When Securities and Exchange Board of India (SEBI) barred private insurance companies not to sell any ULIP products, an inter-regulatory crisis erupted among SEBI and Insurance Regulatory and Development Authority (now IRDAI). ULIP was a product favoured by the industry as it comprised nearly 30-40 per cent commission income for agents during initial years of the policy, and comprised nearly 70 per cent of new business premium income for companies.
Mukherjee saw this as a tactic of regulatory officials and bureaucrats to bypass him. To put at rest the turf war, he got an Ordinance issued, which decided that ULIPs will be regulated by the insurance regulator, even as he formed a high-level coordination committee of regulators, chaired by the finance minister, to resolve future disputes. To assuage Reserve Bank of India’s concerns over the Ordinance diluting some of its powers, RBI Governor was made Vice Chairman of the Committee.