<p>‘Pure magic’ and ‘game changer’ are the phrases central ministers P Chidambaram and Jairam Ramesh used, respectively, to describe the plan to directly credit aid funds into the accounts of target beneficiaries from economically weaker sections.<br /><br /></p>.<p> There is hardly an effort to conceal the motive of electoral benefit for the Congress party behind the Direct Cash Transfer (DCT) scheme. This raises important questions about larger issues relating to public finance and their management.<br /><br />It would be difficult to find fault with the DCT scheme – from the limited perspective of ensuring that government aid reaches the targeted people. The problems of pilferage by intervening layers of the political establishment and government bureaucracy are only too well known. These concerns were articulated by Rajiv Gandhi in 1985 during his historic address to the All India Congress Committee in Mumbai, shortly after the landslide win in the general election. <br /><br />However, the debate will be incomplete if we do not consider several other issues, philosophical and ethical, in dealing with the government handing payouts to poor people.<br /><br />The Keynesian ideas that underpin prime minister Manmohan Singh’s policies are unmistakable, although this has not been explicitly stated or discussed. In broad terms, the British economist John Maynard Keyens (1883-1946) advocated use of government funds and public spending to boost economic growth, more specifically during the cyclical downturns experienced in the industrial economies of early 20th century.<br /><br />Without denying the existence of fiscal deficits in India even before the 1990s, it is true that over the last 20 years India has embraced Keynes’ prescription about government spending. Burgeoning fiscal deficits and enormous increases in public spending during this period are testimony to this fact. It is hardly a coincidence that this trend began with the appointment of Manmohan Singh, a former governor of the Reserve Bank of India (RBI) as the finance minister in 1991.<br /><br />A related strand in Keynesian thought is ensuring governments’ freedom to generate monetary resources – in simple terms, the power to print money. This is considered legitimate, viewed from the lens of government’s role in promoting economic growth. It explains the recent trend to interpret fiscal deficit as a percentage of the Gross Domestic Product (GDP).<br /><br /> Government no longer needs to manage expenses within its revenues, but can continue to generate and spend money as long as the shortfall, measured as a percentage of the GDP, is considered acceptable. To make things worse, there is no such thing as a binding limit on the percentage. The standard is pliant and flexible, which obviously suits the ruling establishment.<br /><br />Financial powers<br /><br />According to a recent report, the government expects fiscal deficit for 2012-13 to be 5.3 per cent of the country’s GDP. This yardstick of fiscal deficit, which has not been publicly debated or evaluated, frees the government from having to spend within its means – namely, tax and other revenues. A by-product of this framework is the vast, indeed unlimited, financial powers the government has acquired and the increased potential it presents for abuse by those in power.<br /><br />In India, an amendment made to the Reserve Bank of India Act in 1957 enables the government to get money from the Reserve Bank on demand. Granting unlimited financial powers to the government has been justified in western countries with arguments about public spending to stimulate economic growth. But the picture is more complicated because economic goals are managed by political classes whose main interest is in preserving their power, position, and privileges. It also facilitates insiders in the government to appropriate resources.<br /><br />Coming to the direct cash transfer plan and considering the government’s position that it promotes efficiency, we must remember the huge deficits the government runs and its reliance on the monetary powers it has under the RBI Act to fund the deficits. In this sense, it is possible to view the funds used for direct cash transfer as money the government prints and then uses for the benefit of the ruling party. <br /><br />Statements made by senior ministers underscore the plan of the Congress party to improve its electoral prospects by handing out inducements to vulnerable sections of the society. In other words, it is no longer about promoting general economic growth which was the original justification for the government’s unlimited financial powers.<br /><br />Almost a decade ago in 2003, a feeble effort to improve fiscal discipline was made by the BJP-led government with the enactment of the Fiscal Responsibility and Budget Management Act. A weak legislation, possibly by design, it lays down no binding rules to contain expenditure or any penalties for violation. The legislation merely advocates fiscal discipline and provides for some procedures that can help in the effort.<br /><br />Significantly, questionable practices in public finance are happening on the watch of Manmohan Singh, a former chief of RBI who has expert knowledge of the system and is able to put it to effective use. It is equally significant that Manmohan relies only on finance technocrats and academics, such as C Rangarajan, former RBI governor and Raghuram Rajan of Chicago University. A broader representation in the prime minister’s council of economic advisers can help in developing a more wholesome and healthier approach to public finance.<br /><br />(The writer is an assistant professor at the University of Ottawa, Canada)</p>
<p>‘Pure magic’ and ‘game changer’ are the phrases central ministers P Chidambaram and Jairam Ramesh used, respectively, to describe the plan to directly credit aid funds into the accounts of target beneficiaries from economically weaker sections.<br /><br /></p>.<p> There is hardly an effort to conceal the motive of electoral benefit for the Congress party behind the Direct Cash Transfer (DCT) scheme. This raises important questions about larger issues relating to public finance and their management.<br /><br />It would be difficult to find fault with the DCT scheme – from the limited perspective of ensuring that government aid reaches the targeted people. The problems of pilferage by intervening layers of the political establishment and government bureaucracy are only too well known. These concerns were articulated by Rajiv Gandhi in 1985 during his historic address to the All India Congress Committee in Mumbai, shortly after the landslide win in the general election. <br /><br />However, the debate will be incomplete if we do not consider several other issues, philosophical and ethical, in dealing with the government handing payouts to poor people.<br /><br />The Keynesian ideas that underpin prime minister Manmohan Singh’s policies are unmistakable, although this has not been explicitly stated or discussed. In broad terms, the British economist John Maynard Keyens (1883-1946) advocated use of government funds and public spending to boost economic growth, more specifically during the cyclical downturns experienced in the industrial economies of early 20th century.<br /><br />Without denying the existence of fiscal deficits in India even before the 1990s, it is true that over the last 20 years India has embraced Keynes’ prescription about government spending. Burgeoning fiscal deficits and enormous increases in public spending during this period are testimony to this fact. It is hardly a coincidence that this trend began with the appointment of Manmohan Singh, a former governor of the Reserve Bank of India (RBI) as the finance minister in 1991.<br /><br />A related strand in Keynesian thought is ensuring governments’ freedom to generate monetary resources – in simple terms, the power to print money. This is considered legitimate, viewed from the lens of government’s role in promoting economic growth. It explains the recent trend to interpret fiscal deficit as a percentage of the Gross Domestic Product (GDP).<br /><br /> Government no longer needs to manage expenses within its revenues, but can continue to generate and spend money as long as the shortfall, measured as a percentage of the GDP, is considered acceptable. To make things worse, there is no such thing as a binding limit on the percentage. The standard is pliant and flexible, which obviously suits the ruling establishment.<br /><br />Financial powers<br /><br />According to a recent report, the government expects fiscal deficit for 2012-13 to be 5.3 per cent of the country’s GDP. This yardstick of fiscal deficit, which has not been publicly debated or evaluated, frees the government from having to spend within its means – namely, tax and other revenues. A by-product of this framework is the vast, indeed unlimited, financial powers the government has acquired and the increased potential it presents for abuse by those in power.<br /><br />In India, an amendment made to the Reserve Bank of India Act in 1957 enables the government to get money from the Reserve Bank on demand. Granting unlimited financial powers to the government has been justified in western countries with arguments about public spending to stimulate economic growth. But the picture is more complicated because economic goals are managed by political classes whose main interest is in preserving their power, position, and privileges. It also facilitates insiders in the government to appropriate resources.<br /><br />Coming to the direct cash transfer plan and considering the government’s position that it promotes efficiency, we must remember the huge deficits the government runs and its reliance on the monetary powers it has under the RBI Act to fund the deficits. In this sense, it is possible to view the funds used for direct cash transfer as money the government prints and then uses for the benefit of the ruling party. <br /><br />Statements made by senior ministers underscore the plan of the Congress party to improve its electoral prospects by handing out inducements to vulnerable sections of the society. In other words, it is no longer about promoting general economic growth which was the original justification for the government’s unlimited financial powers.<br /><br />Almost a decade ago in 2003, a feeble effort to improve fiscal discipline was made by the BJP-led government with the enactment of the Fiscal Responsibility and Budget Management Act. A weak legislation, possibly by design, it lays down no binding rules to contain expenditure or any penalties for violation. The legislation merely advocates fiscal discipline and provides for some procedures that can help in the effort.<br /><br />Significantly, questionable practices in public finance are happening on the watch of Manmohan Singh, a former chief of RBI who has expert knowledge of the system and is able to put it to effective use. It is equally significant that Manmohan relies only on finance technocrats and academics, such as C Rangarajan, former RBI governor and Raghuram Rajan of Chicago University. A broader representation in the prime minister’s council of economic advisers can help in developing a more wholesome and healthier approach to public finance.<br /><br />(The writer is an assistant professor at the University of Ottawa, Canada)</p>
