Babu Rao is an officer on special duty in the project analysis wing of the Finance department. His job is to look at the financial and economic viability of projects. Given the available budget, the projects with higher returns are picked up for funding or seeking aid from external donors. Although the procedure is involved, its principles are simple. The analysts calculate for each year of the project’s usefullife,the expectedexpendituresandrevenues. As these flowsoccurindifferentyears,they have to be made comparable. For this purpose, the revenue and expenditure flows are discounted using a particular interest rate. Discounting means that their magnitudes are reduced by using a factor based on the interest rate. Due to discounting, the actual numbers of future streams of expenditure and income become smaller. The same numbers of expenditure and income of say year 5 will become smaller than those of year 3. The present values of future income and expenditure depend on two factors: interest rate and the future year in which they occur. In this process, the present value of the numbers of later years in future becomes less than that of earlier years in future. These income (benefit) and expenditure (cost) streams, which are reduced to their present values, are added and compared. In short, the projects which have higher benefit-cost ratios in terms of present values are selected for funding.
In this process, a pet project of a powerful minister is dropped. The incensed minister calls Babu Rao for discussion. Babu Rao tries to explain things. But the minister berates him for slashing the solid Rs 100 crore revenue of seventh year to almost Rs 15 crore. After some discussion, the minister realises that if the interest rate used for discounting expenditure and revenue flows is reduced, the project will become viable. He asks Babu Rao to cut that rate. Babu Rao refuses saying that the rate is prescribed by the Department of Economic Affairs.
What should Babu Rao do in the above circumstances?
1. Follow minister’s orders.
2. Babu Rao should give up his narrow accounting perspective and adopt a wider social point of view.
3. He should politely express his inability to follow the minister’s instructions.
4. He should tell the minister that he would write to the Department of Economic Affairs seeking a lowering of the rate of interest.
Babu Rao is a professional in finance area. He has to follow the prescribed procedures of project analysis. Professionalslike doctors and engineers have to followthe relevant technical codes in their work area. Babu Rao cannot be guided by the minister’s unprofessional advice in this matter. So this option is wrong.
The second alternative confuses two distinct matters. Babu Rao, while discharging his functions as a finance professional, has to go by his professional training in accounting and related subjects. As a citizen, he can of course adopt whatever social philosophy appeals to him. His role as a finance specialist should not be confused with his role as a citizen. Hence this choice is inappropriate.
The third option is the correct one. Babu Rao has to provide professional inputs into decision makingbased on hisknowledge andbest judgement. He cannot substitutethe minister’sjudgement in place of his judgement. The Department of Economic Affairs gave the discount rate which Babu Rao used. Incidentally, the rate measures the relative scarcity of capital in Indian economy and is a measure of the value or cost of capital. While evaluating projects, this uniform rate has to be used. It cannot be changed at the minister’s bidding. But Babu Rao should not quarrel with the minister, but simply indicate that he is bound to use that rate.
Thelast alternative is also inappropriate. He cannot writeto theDepartment of EconomicAffairs to changethe rate. It is decided after detailedconsultations with monetary and fiscal authoritiesand expert agencies. In addition, it is not within his province to make such proposals.
There is a rule which prescribes that when oral orders are given, they should soon thereafter be authenticated by the officer who issued them. This rule is a fall out of the Emergency period under Shrimati Indira Gandhi. Justice Shah Commission inquired into various controversial happenings during Emergency. Many officers then took the plea that they followed the orders of higher officers. The higher officials, as it usually happens in such contingencies, washed their hands of the matters. To avoid this problem and fix accountability, Shah Commission recommended that officers who issue oral orders should confirm them later in writing. There is another rider to this rule which says that it should not be used to toss up matters which lie within one’s assigned powers. The point here is that a civil servant should not evade responsibility.