funny fish - etymology background?

Solution 1:

Funny in this case just means strange, or unusual; and, notwithstanding Rushdie's deft use of alliteration, a fish just means a thing, as in "a kettle of fish". So, a funny fish is just a strange thing:

Need's a strange thing: it makes people untruthful.

The use of fish brings to mind Shakespeare's phrase a cold fish, to indicate a heartless person:

it was thought she was a woman and was turned into a cold fish for she would not exchange flesh with one that loved her

A Winter's Tale, Act 4, Scene 4

Also, there is the phrase kettle of fish, where fish refers to some unspecified object. See: Origin of “kettle of fish”.

funny adjective (STRANGE)

strange, surprising, unexpected, or difficult to explain or understand:

The washing machine is making a funny noise again.

Cambridge Dictionary