The murky motivations behind Cong’s love of cash transfers

Sixkku appuram seven da, Sivajikku appuram yevenda,” says Superstar Rajinikanth in the tremendously entertaining Sivaji – The Boss. The line basically means that “after six there is seven, after Sivaji there is no one.”
Like there is no one after Sivaji (or should we say the one and only Rajinikanth) similarly there is no one in the Congress party beyond the Gandhi family. And the party can go to any extent to keep the family going and at the centre of it all.
Take the recent decision of the Congress led United Progressive Alliance (UPA) government to implement the direct cash transfers scheme in a hurry.  
On the face of it one cannot really question the good logic behind the scheme. The idea is to make cash transfers directly into the accounts of the citizens of this country instead of offering them subsidies, as has been the case until now. This transfer will happen through Aadhar unique ID card enabled banks accounts.
As The Hindu reports quoting the finance minister P Chidambaram “Initially, 29 welfare programmes — largely related to scholarships and pensions for the old, disabled — operated by different ministries will be transferred through Aadhaar-enabled bank accounts in 51 districts spread over 16 States from January 1, and by the end of the next year it should cover the entire country, Mr. Chidambaram said. He added that only at a later stage would the government consider the feasibility of cash instead of food (under the Public Distribution System) and fertilizers, since it was more complicated.”
So far so good.
But the question is why is the government in such a hurry to implement the scheme? The scheme is to be implemented in 51 districts January 1, 2013 and eighteen states by April 1, 2013, the start of the next financial year. The government hopes to implement the scheme in the entire country by the end of 2013 or early 2014.
A scheme of such high ambition first needs to be properly tested and only then fully implemented. As has been explained in this earlier piece on this website there have been issues with the government’s other cash transfer programme, the National Rural Employment Guarantee Scheme (NREGS).
There have also been issues with pilot projects that have been carried on the cash transfers scheme till now. In one particular case people who got the subsidy had to spend a greater amount of money than the subsidy they received, in getting to the bank and collecting their subsidy.
The other big issue that might come up here is the opening of bank accounts. While the Aadhar Card does identify every person uniquely, India remains a terribly under-banked country. And that is something that needs to be set right in a very short period of time, if the direct cash transfers system needs to get anywhere.
The big selling point of the direct cash transfers scheme is that leakages which happen from the current system of subsidies will be eliminated. For example, currently a lot of kerosene sold through the subsidised route does not reach the end user and is sold in the open market where it is also used to adulterate petrol and diesel, among other things. Some of this kerosene also gets smuggled into the neighbouring countries where kerosene is not as cheap as it is in India and hence there is money to be made by buying kerosene cheaply in India and selling it at a higher price there.
Now people will buy kerosene at its market price and the subsidy will come directly into their bank accounts. So the subsidy will reach the people it is supposed to reach and will not enrich those people who run the current system.
While this sounds very good on paper, the reality might turn out to be completely different as an earlier piece on this website explains and the so called leakages might continue to take place.
Hence, its very important to run pilot tests in various parts of the country, solicit feedback, implement the necessary changes and then gradually go for a full fledged launch. A system of such gigantic proportion cannot be built overnight as the government is trying to.
So that brings us back to the question why is the government in such a hurry to implement direct cash transfers scheme? And in a way screw up what is inherently a good idea.
The answer probably lies in what Jairam Ramesh, the Union Rural Development Minister told The Hindu ““The Congress is a political party, not an NGO. We had promised cash transfer of benefits and subsidies in our election manifesto of 2009,” Mr. Ramesh said, asking “Where is the talk of elections?””
But as the great line from the great political satire Yes Minister produced by the BBC goes “The first rule of politics: never believe anything until it’s been officially denied.” So this hurry to get the scheme going is nothing but the Congress party getting ready for the 2014 Lok Sabha polls.
As an article in the India Today magazine points out “The government’s calculation is that just as the National Rural Guarantee Act and the farmer loan waiver had sealed its victory the 2009 Lok Sabha elections, the direct cash transfer of subsidies would do the same in the 2014.”
Or as Ramesh put it more aptly by getting into the poll mode “aapka paisa, aapke haath“. And this is being done to ensure that the Congress party does well in the next Lok Sabha elections and Rahul Gandhi becomes the prime minister of India.
There are several interesting points that arise here. The first point is that the launch of the cash transfers system will give the Congress politicians battling a string of corruption charges something new to talk about. And that is important.
Indira Gandhi established by winning the 1971 Lok Sabha with her Garibi Hatao slogan that it is important to talk about the right things in the run up to the elections irrespective of the fact whether anything concrete about it is done or not, in the days to come.
There is no one more cunning as a political strategist this country has had than Mrs Gandhi. And every Congressman worth his salt knows that. It is more important to make the right noises than come up with results.
The second point that comes out here is that the government is making all the right noises about this scheme being fiscally neutral. This means that the expenditure on
subsidies won’t go up. Only the current subsidies on offer will now be distributed through this route. This is something that I am unwilling to buy.
I wouldn’t be surprised if the right to food act is set in place in the days to come before the 2014 Lok Sabha elections. The excuse will be that now that we have a direct cash transfer set up in place we are well placed to launch the right to food act as there will be no leakages.
While the idea behind subsidies is a noble one, the government of India is not in a position to foot the mounting bills. The fiscal deficit for the year 2012-2013 has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
As the Kelkar committee on fiscal consolidation recently pointed out “A careful analysis of the trends in the current year, 2012-13, suggests a likely fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent of GDP, if immediate mid-year corrective actions are not taken.” The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore. And I believe that the Kelkar committee’s estimates are fairly conservative. So we might very end up with a higher fiscal deficit if the direct cash transfers system is used to launch more subsidy programmes as I guess would be the case.
And that brings me to my third point. As the India Today magazine points out “The cash transfer of subsidies estimated to be worth Rs 3,20,000 crore will not be an easy task. Procedurally, one of the major obstacles would be the fact that many of the beneficiaries might not even have bank accounts. But more significantly, the scheme does nothing to address the main problem – bring down the subsidies to ease the pressure on the exchequer.”
High subsidies basically imply greater borrowing by the government. This in turn means lesser amount of money being available for others to borrow and hence higher interest rates. Higher subsidy also means more money in the hands of Indian citizens. This more money will chase the same number of goods and services and hence lead to higher inflation. Also be prepared for a higher food inflation in the years to come.
Higher interest rates will mean that the lower economic growth will continue in the time to come despite of what the politicians and the bureaucrats would like us to believe. Consumers will take on lesser debt to buy homes, cars and consumer goods. This will be bad for business, and in turn they will go slow on their expansion plans and thus impact economic growth further.
As Ruchir Sharma writes in his bestselling book Breakout Nations. “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
And that’s the cost this country will have to take on a for one party’s love for a family. To conclude, let me quote something that Ramchandra Guha writes in the essay Verdicts on Nehru which is a part of his latest book Patriots and Partisans “Mrs (Indira) Gandhi converted the Indian National Congress into a family business. She first brought in her son Sanjay, and after his death, his brother Rajiv. In each case, it was made clear that the son would succeed Mrs Gandhi as head of Congress and head of government.”
The sudden hurry to implement the direct cash transfers system probably tells us that this generation’s Mrs Gandhi has also made it clear to Congressmen that her son is ready to take over the reins of this country.
Hence, the Congress government is now working towards making that possible. In the process India might get into huge trouble. But we will still have Rahul Gandhi as the Prime Minister.
And that is more important for Congressmen right now than anything else.

The article was originally published on on November 29,2012.
(Vivek Kaul is a writer. He can be reached at [email protected]