UID's unintended effect

When cash transfers are easy, will govts spend too much?

The central government is going full speed ahead with the operationalisation of the Aadhaar platform. About 50 districts will have various pilot projects running soon; and it intends the entire country, more or less, to have access to the Unique ID-empowered variants of existing schemes by the end of 2013, according to a recent statement by the finance minister. The movement to cash transfers for welfare spending is overdue and presents the possibility of considerable saving. That the United Progressive Alliance (UPA) government has finally closed ranks behind the only real policy initiative of its second term in government is, therefore, welcome, as is the unexpected and most unusual speed with which it is working to connect the UID to various state schemes. Indeed, even the Reserve Bank of India, which had been holding out against the Aadhaar card as sufficient to fulfil know-your-customer obligations for some time, is now expected to issue a circular shortly allowing the card’s use as a sufficient identity proof for a new account, allowing for the rapid expansion of basic banking. It is now an accepted fact that the transparency and uniqueness of Aadhaar will help the government control its runaway welfare expenditure.

However, this is a static, and not a dynamic, perspective. It does not completely allow for the ways in which India’s politics may adapt to the possibility of cash transfers using Aadhaar and bank accounts. Consider the news that came in last weekend, over the birthday of former Uttar Pradesh chief minister Mulayam Singh Yadav. The state government led by his Samajwadi Party declared that farmers who had taken loans of more than Rs 50,000 from the state co-operative bank and had managed to pay back at least 10 per cent of the amount before April this year would be eligible for a loan waiver. This is expected to cost an already cash-strapped state Rs 1,650 crore. The government has fortunately exempted loans taken from state-run banks from the waiver, or the cost would have been a multiple of that amount. Of course, the Akhilesh Yadav-led government is also moving forward with its promise to deliver an unemployment allowance of Rs 1,000 to young people between 25 and 40 years of age. These schemes, part of the Samajwadi Party’s election manifesto, were believed to be a large part of why it won back power in Lucknow earlier this year. The question that must be asked is: when transfers become easier for governments to pull off, through Aadhaar-linked bank accounts, what will happen to India’s public finances?

The Union Budget for 2012-13 included a throwaway promise that subsidies would be capped at two per cent of gross domestic product. Certainly, the UPA has made little progress towards ensuring this target is met. Yet if it is politically problematic to control subsidies today, it may become even harder when cash transfers become a reality. It is time, perhaps, for Parliament to write into law a constraint binding the executive from an overextension of subsidies. Article 292 of the Constitution empowers Parliament to control government borrowing, but it is rarely invoked through direct legislation. The Fiscal Responsibility and Budget Management Act has been largely ignored for the past few years. A harder limit on the government spending beyond its means is overdue. Else the unintended consequence of Aadhaar – unending fiscal profligacy – might well leave India with a crushing burden of debt.