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Photo: iStock

Opinion | The Bimal Jalan panel should back intergenerational equity

If RBI’s reserves are to be taken away from its direct control, they should be placed in a sovereign fund for investment

The manoeuvre against the Reserve Bank of India’s “unrealized gains" reminds public finance enthusiasts of James Tobin, an American economist who served on the Council of Economic Advisers and the Board of Governors of the Federal Reserve System. In 1974, the Nobel laureate economist said, “The trustees of endowed institutions are the guardians of the future against the claims of the present. Their task in managing the endowment is to preserve equity among generations." Those who advocate intergenerational equity in the arena of Indian public finance recall nostalgically the A.B. Vajpayee government’s courageous push to institutionalize its commitment to intergenerational equity by launching the National Pension System. The Vajpayee government moved from a system of defined pension benefits to one of defined contributions, putting India on the path of saving future generations from the burden of the present generation’s big government predilections.

Of late, asset monetization has emerged as the thing to do in the name of financial reforms. The cacophony has become so deafening that even economists have stopped discussing the tax-GDP ratio, its precarious prognosis and necessary dos and don’ts. God forbid if the “josh" for asset monetization turns out to be a mere diversionary stance to keep hidden defeatism on the tax-GDP ratio coming to the fore. It is nobody’s case that asset monetization per se is bad. However, if it is done sans adequate regard for intergenerational equity, it would be poor public finance management. Already, it has acquired a dubious name since sale proceeds are frittered away in the name of bringing the fiscal deficit down to levels generally considered desirable by neoliberal economists. Neither does it enhance fiscal prudence in expenditure management, nor does it address concerns of intergenerational equity. It unwittingly obliterates the difference between recurring and non-recurring receipts. Like this author, many have been advocating that asset monetization receipts should invariably be held in a fund that institutionalizes and enhances safeguards against erosion of intergenerational equity. One may call it a “capital fund" or perhaps “sovereign fund". The amount so accumulated and available should never be available to bolster the government’s expense account, but only be invested either as equity or debt. This will keep non-recurring receipts available for generations to come. A specified share of the returns on these investments must also be ploughed back to the fund so that its corpus is enhanced organically year after year to mitigate any erosion in its real value over time. The Narendra Modi government would do a yeoman’s service to India’s public finance management if it undertakes to amend Article 266 of the Constitution to institutionalize the principle that such receipts only be used for investment. The fund should be used by the government of the day to invest as equity or debt in projects in the same way that multilateral funding works for national and sub-national projects.

The road to hell is paved with good intentions, wise men proclaim, which is why the RBI-finance ministry feud over its “unrealized gains" deserves a close look. Supporters of asset monetization claim that state expenditure is being compressed to the extent practicable and also that only assets the public sector does not need are being monetized. Anyone pooh-poohing these efforts risked being seen as anti-progress, wise men warn. Yet, in their zealous pursuit of debt reduction, development protagonists want RBI to not only loosen the purse strings, but also open its coffers on the argument that much more is lying idle than ever will be required for contingencies. The central bank has in the past resisted the move as inimical to its independence and institutional status, but it would appear that the cause of intergenerational equity and the need to guard against financial vicissitudes in the long-term does not carry much conviction, and it has had to refer the matter to a panel headed by former RBI governor Bimal Jalan.

The fond hope must be that the Bimal Jalan panel will not recommend any mechanism that works to the detriment of intergenerational equity, which had achieved priority as an aim under the Vajpayee government. If reserves and surpluses available with RBI are to be relocated away from the central bank’s direct control, then they should be placed in a separate fund. Such surpluses should not be brought into play in the race for fiscal deficit containment. Lest our concerns over intergenerational equity are forsaken by default, these surpluses must only be invested as equity or debt through an institutionalized arrangement—say, via a sovereign fund—and not used as a one-time windfall gain for the consolidated fund of India.

Mohammad Haleem Khan retired as secretary to the ministry of finance, government of India.

These are the author’s personal views

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