Kaushik Basu warns of inflation shadow on direct cash transfer

The World Bank chief economist says scheme needs to be indexed so that the poor don't suffer

With the United Progressive Alliance government gearing up to implement the direct cash transfer scheme (DCT), World Bank Senior Vice-President and Chief Economist Kaushik Basu today cautioned that the move might create a risk of inflationary pressure on the economy. He indicated the scheme should be indexed to adjust with inflation.

Under DCT, the Centre plans to disburse subsidies directly to the poor through bank accounts, which, to start with, will be implemented in 51 districts in 18 states from January 1.

“Once DCT is implemented, there is a risk of higher inflation as more money is pumped into the system. However, we have enough tools to counter it,” said Basu, who had been the former chief economic adviser to the government till a few months ago.

Basu added the scheme needed to be indexed to adjust with inflation so that the poor were not affected. “When you switch over to DCT, you index it. You have to index it, so that it does not erode with inflation. So that the people continue to have the same buying power,” he said, while speaking on the sidelines of an event here. Basu later clarified that the net impact of DCT on inflation might be negligible as it was replacing subsidies.(AWAITING AADHAAR)

Through the project, the government aims to disburse subsidies worth Rs 3 lakh crore to the targeted beneficiaries. About 29 welfare schemes under various ministries will be transferred through Aadhaar-enabled bank accounts, targetting more than 1 million households in the country.

Reforms to bring economy back to 9% growth path
Backing the government’s recent reform measures like allowing foreign direct investment in retail, initiating DCT and introducing land acquisition Bill and banking reforms, the former chief economic adviser said: “These reforms will bring back economic growth to the nine-per cent mark again in the next three years. However, the next two years will be difficult for us due to the recessionary trends and major economic crisis in Europe.”

If inflation can be kept at five-six per cent along with growth, that will be comfortable for the country, Basu said. “When you are growing rapidly, we have to live with some inflation. Real growth means you are getting more food, more cloth and everything which is a cushion against inflation. If we can keep at five-six per cent, it will be worth it,” he added.