What are the economic ideas of Arvind Panagariya, the vice chairman of NITI Aayog? In a speech in February last year he had expressed rather radical ideas of reform on social spending. Will they be too hot for the PM? This is fourth part of a multi-part series
Prime Minister Narendra Modi dismissed the Planning Commission and set up the National Institution for Transforming India (NITI) Aayog. As expected, Modi appointed his long-time supporter, economist and professor Arvind Panagariya as the vice chairman of NITI Aayog. Pangariya, as an economist is known for his radical views on reforms, and it would be interesting to see, if PM Modi subscribes to his views and actually carries out the NITI Aayog vice chairman's suggestions. What are his thoughts?
For this, let us turn to CD Deshmukh Memorial Lecture 'A Reform Agenda for India's New Government' on 11 February 2014. That lecture is fairly exhaustive and is almost a blue print for reforms and growth. Pangariya outlined a strategy of reforms along two tracks, one of faster, employment intensive growth and second, expanded and more effective social spending.
Talking about expanded and effective social spending, he said, accelerated growth in GDP leads to accelerated growth in government revenues even when their share in GDP is unchanged. "Accelerated revenues translate into accelerated government spending. To illustrate what difference growth can make, observe that given a doubling of per-capita income between 1999–2000 and 2012–13, a per-capita expenditure on education achieved by allocating 4% of GDP to it in the latter year would have required the allocation of a whopping 8% of GDP to that sector in the former year. Therefore, the scope for expanding social spending rises rapidly with growth. But, it is important that this spending is effective in targeting the objective for which it is meant."
"Sadly, our existing social spending has been disproportionately failing in targeting its objectives. For example, according to a 2005 Planning Commission report, the Targeted public distribution system (PDS), which is designed to deliver subsidized food grain to the poor, spent a gigantic Rs3.65 to transfer just Re1 worth of subsidy to the poor. There are similar problems with our other programs such as rural employment under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and government delivery of health services. A large chunk of labour under MNREGA is wasted each year on projects that produce no tangible assets, public or private. Likewise, even in rural areas, nearly 80% of the population goes to private providers for outpatient care because the sub-centres and primary healthcare centres are often dysfunctional."
"With its limited revenue resources and the vast need for the provision of food, education and health, India can ill-afford such poor delivery of services. Reforms must help make the delivery more effective," Panagariya said.
In his speech in February 2014, the now vice-chairman of NITI Aayog, focussed on six different areas, including the first two that overlap with infrastructure but are so important for human development that they bear repeating.
It is a matter of great disappointment that one-third of Indian homes still lack access to electricity. Even homes equipped with an electric connection lack its flow around the clock, seven days a week. The problem is of mega proportions in two states: Bihar and Uttar Pradesh (UP). As of 2011, only 16% of households in Bihar and 37% in UP had electricity. This contrasts with states such as Gujarat where electricity is available around the clock and reached 90% households in 2001. Other states such as Tamil Nadu, Andhra Pradesh, Punjab and Haryana have also achieved similar success.
The next government must take electrification on war footing bringing electricity to no less than 90% of the households in every state in ten years or less.
ALL-WEATHER RURAL ROADS
The NDA government had launched the Prime Minister’s Gram Sadak Yojana with the aim of connecting every village to state and national highways through all-weather roads. Like electrification, the next government must give this program a new lease of life and substantially fulfil the promise of the scheme in five years.
FOOD AND NUTRITION
India recently passed the Food Security Act of 2013, which promises to provide rice, wheat and millets at highly subsidized prices to 75% of the rural and 50% of the urban population. But there remain three key weaknesses of this approach to solving the problem of nutrition.
• Proteins, not carbohydrates
This approach is centred on carbohydrates but the far more serious problem that India faces is the lack of protein in people’s diet. Cereal consumption at different levels of income does not vary at all in urban areas while it varies only by small margins in rural areas. But when it comes to milk, it varies between less than 1 kg per person per month among the bottom 5% to more than 10 kg per person per month among the top 5% of the households. This same discrepancy also applies to eggs and fruits and vegetables. So India needs to expand the white revolution while also taking steps to boost the production of fruits and vegetables. Above all, the country needs to boost the purchasing power of people to be able to afford these basic needs of ordinary citizens.
• Information and awareness
Unless people themselves understand and appreciate the importance of a nutritious diet, giving them cereals at subsidized prices will be insufficient to persuade them to consume more of them. Chhattisgarh state has a well-functioning public distribution system with near universal coverage and yet cereal consumption at all levels of income in the state mirrors the national average. Therefore, the next government must promote sustained information campaigns on nutrition through all possible media outlets, including advertisements featuring top sports and movie stars, doctors, and even the prime minister.
• Public Distribution System or cash transfers
Simple economics tells us that giving a part of the quantity of food grains consumed by households at subsidized prices has virtually no impact on the total quantity of their consumption of these grains. The experience of Chhattisgarh just mentioned testifies to this proposition. When we combine this observation with the massive leakages in the Public Distribution System—40% or more of grain provided by the Centre fails to reach the actual beneficiaries—the case for continuing this system is considerably weakened. The next government must seriously consider experimenting with direct cash transfers using all instrumentalities such as bank transfers, postal money orders and mobile phone technology. It should allow people a choice between cash and in-kind subsidies. This will empower people, who can decide whether they want cash and buy what they wish, and from whom they wish, or buy subsidized food from government shops.
EMPLOYMENT GUARANTEE IN RURAL AREAS
We now have MNREGA fully operational in all of rural India. While the scheme has put some purchasing power into the hands of poor households, the returns on it remain poor on many fronts. First, there has been little creation of public assets. This has meant that both the material and the labour used on projects have been largely wasted. Second, the scheme has seen far less success in providing employment in the poorer states than in the richer states.
According to the accountability initiative at the Centre for Policy Research, in 2010–11, Uttar Pradesh state generated 13% of the total MGNREGA employment despite accounting for 20% of the below-poverty-line (BPL) rural population of India. Andhra Pradesh and Tamil Nadu provided 23% of the total MGNREGA employment even though they together accounted for only 8% of the country’s rural BPL households. Finally, MNREGA produces no skills. Indeed, it requires that employment be of the unskilled nature. My own recommendation would once again be to allow households a choice between cash transfers at the rate of 75% or less of the NREGA wages and employment at full wages.
If the government finds this politically infeasible, it must try to forge a link between MNREGA and the building of houses and toilets for the poor in the village using the labour and materials made available under the scheme. Given that those employed are also predominantly poor, this approach would produce a coincidence of the interests of those doing the building work and those benefiting from it. Such a link may also bring about some checks to corruption in the existing public works programs.
Like higher education, elementary education in India remains in crisis. Enrolments have steadily risen in the last decade to levels that now leave only a tiny proportion of children between 6 and 14 years out of school. In turn, this has made it feasible for the UPA II government to pass in 2009 legislation implementing a right to education. But, the quality of education in government schools as measured by student achievements is low and declining. We must consider at least two possible solutions:
• Priority given to performance in school evaluation criteria
In assessing schools for the purposes of recognition, the Right to Education (RTE) Act relies exclusively on input norms. Offering automatic promotions at all levels, it also does away with all board examinations. We need to revisit these provisions and perhaps consider giving the states greater room in deciding the norms. In Gujarat, the government has chosen to give 70% weight to academic achievements of students when evaluating a school for continuing recognition. In all likelihood, this practice does not conform to the RTE Act and may be challenged in the courts. This threat must be removed by empowering states to amend the RTE legislation to suit local conditions.
• Greater freedom in school choice
The RTE Act reserves 25% enrolment in unaided private schools for economically and socially disadvantaged students. The Act also commits the government to funding these students at the same level as the expense incurred per student in government schools. This provision can potentially serve as an instrument for expanding private school enrolments. But a more effective means of empowerment would be to give the parents vouchers in the amount the state spends per child on education and let them decide whether they wish to go to a private or government school.
India is in urgent need of a comprehensive health policy. Let me spell out some broad contours of what the next government must try to accomplish.
• Public health
Today, public health is the weakest link in our health delivery system. By the same token, public health promises the highest social return on investment. Most states invest their meagre resources in curative care rather than public health services. The result has been the neglect of public health services such as drainage systems, supply of drinking water and sanitation. A bout of monsoon rains is often enough to clog drains and create swampy conditions conducive to the quick spread of communicable diseases. The next government must change this state of affairs. It must persuade states to create separate public health departments with their own budgets. In addition, it must take the provision of piped water and modern toilets on a war footing. It should be the goal of the next government to ensure that every house has piped water and a toilet within ten years. It must also work tirelessly to create greater awareness among citizens toward personal hygiene and sanitary conditions in the surrounding areas. Tolerance for unhygienic conditions in India remains high, relative to other countries, and this needs to be changed.
• Medical personnel
India faces exceptional shortages of health related human resources—doctors, nurse practitioners, nurses, midwives and pharmacists. Unqualified providers dominate the private sector, especially in rural areas. Growing incomes, populations and efforts by the government to improve access to health services will magnify this shortage. Therefore, the next government will need to invest in improving the medical human-resource base in a major way. It must create one-year basic training programs for all rural medical providers through District Health Knowledge Institutes. It should also massively expand the number of qualified MBBS doctors.
This requires loosening the stranglehold of the Medical Council of India. In turn, this can be achieved by allowing each state to establish its own medical council that decides the norms for opening medical colleges and the norms of medical practice within the state.
• Routine healthcare
The next government should ensure that citizens have enough purchasing power to access routine healthcare services. While the government can offer these services at cost, it should let patients decide whether they wish to go to a government or private facility. This will promote efficiency. For example, many routine illnesses can be dealt with through home remedies so that citizens may sometimes wish to save the potential expense of the treatment of those illnesses for a rainy day.
• Major illnesses
Major illnesses result in a large expense per episode and often involve surgical procedures. Childbirth and maternity care also fall in this category. Here we need medical insurance. Several insurance schemes are currently in operation but it is time that we aim to expand them to achieve near universal coverage. The next government must consider covering the bottom half of the families for up to Rs50,000 per year of medical expenses on major illnesses at its expense.