Cost of rural services

While newspaper reports talk of rural and agrarian distress in India, India’s statistical organisation produced a monthly CPI report for December 2018 in which rural healthcare and education costs jumped sharply higher. Headline inflation rate: 2.2%. Core inflation rate: 5.7%. Rural healthcare inflation: 9.0% and rural education inflation: 8.4%. That defies explanation. SBI Chief Economist wrote:

The most puzzling aspect of the inflation data is the increase in rural health and education inflation at the time when rural demand is collapsing. A deep analysis of this completely contrarian behavior is warranted, however, as of now it seems that it could be a combination of methodological changes in data collection and implementation of Aayushman Bharat  Scheme which might have led to an upgradation of health services at least in rural areas. However, even then the jump in healthcare costs is happening mostly because of jump in medicine costs from non-institutional sources, that begs explanation.  Another baffling aspect is the jump in education inflation in rural areas. Clearly, the CSO should clarify the doubts of such a significant increase in service costs in rural areas since October 2018. Is it a data error? We don’t know yet. 

With such data collection and lack of proper statistical and seasonal adjustments, it may not be possible to make sound public policy. Bad data can and do beget bad policy.

Keynes and Krugman

The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. [Link]

Most people who know of Keynes and economics would have heard of or read the above quote.

But, these days, it has been more appropriate to reword it the other way around: most economists are usually slaves of some defunct political ideology. Or, they disgrace themselves by allowing themselves to be enslaved by some defunct political ideology or policy idea.

Krugman defending Alexandria Ocasio-Cortez’ proposal for a 70% top marginal tax rate in an indefensible manner is an example of that.

That forms the subject matter of my MINT column tomorrow.


Did not realise that my last blog post was on Jan. 6, 2019. I had come out of a procedure called ‘Stapled Haemorrhoidectomy’ on Jan. 3. It was a simple procedure performed under General Anaesthesia (GA) but I was discharged in less than two hours. Until the 6th of January, probably, I was still under the influence of GA and hence did not feel the pain that much. Between the 7th and the 11th, life was tough. Very tough. Since then, it has become just tough.

I wish I was given adequate information on what to expect after the surgery, as part of the recovery process. In that sense, I failed too. I should have demanded (and/or scoured the Internet) information on the worst-case scenario – in terms of time required for recovery, intensity of pain and all the symptoms and reactions that the body would experience. I did not do so. That is my failure.

Not that having the information would have eliminated them occurring. Far from it. I might have scheduled the surgery at a different time. Second, mental preparation is everything.

So, eleven days after the surgery, life remains tough and painful but I have to ease myself back into it.

Independence and interdependence

What follows are verbatim extracts from a speech delivered by Dr. Y.V. Reddy at a conference held in Patna nearly a month ago on public finance:

In brief, the three policies like all other policies have an over-arching objective of welfare with each policy having its own defined set of objectives and appropriate operating instruments to achieve the specified objectives.  It is believed that one of the contributing factors to Global Financial Crisis (GFC) is underestimating the inter-dependence of these policies, and over-emphasising their independence. 

[The three policies he is referring to are fiscal, monetary and regulatory]

Exclusive focus of monetary policy on price stability had its pitfalls.  It has become clear that financial stability considerations, in particular, the asset prices, cannot be ignored.  The possibility of excess liquidity provided by the monetary authorities for a prolonged period impacting the excesses in finance is noted. 

The assumption that financial markets correct themselves and have a benign influence on growth is questioned.  The incentive mechanisms in the financial institutions and the possibility of excessive financialisation in the financial markets are recognised. 

[In the paragraphs above, he is pointing to the lessons learnt from the crisis of 2008. I guess, they are lessons that ought to have been learnt but not quite learnt]

As regards monetary policy, RBI rejected inflation targetting and single objective, unequivocally.  It did not share the enthusiasm for capital account convertibility and decided to manage impossible trinity.

[That is a nice summary of the policy framework of RBI under his leadership]

While concerted action was possible for strengthening the private sector banking system, the regulatory actions of a prudential and counter-cyclical nature by the RBI were undertaken despite some resistance from government and financial markets. 

[He is rather understated here, on the tensions that existed between RBI and the Government of India in 2006-08 on the regulation of the financial sector]

The objectives of monetary policy in India continued to be price stability or credit for productive activities, depending on the context.  Inflation targeting was not adopted in India. Dominance of banking, in particular, public sector continued though presence of private sector increased.  There was a cautious deregulation of the banking sector.  Counter-cyclical prudential policies were followed, and capital account was managed.

[That is an excellent summary of the differences in the global ‘best practice’ (?) and Indian policy framework between 1993 and 2008. After 2008, the world has copied some of the above practices.]

A common thread in all these arrangements is that they were intra public sector transactions that were transparent and strengthened effectiveness of public policy.  All of them strengthened the balance sheet of RBI to enable it to serve the economy and government. 

[He is referring to the various arrangements put in place between the GoI and RBI on management of foreign exchange reserves, sterilisation costs, on the guarantees that RBI had extended on foreign exchange losses, etc. Indirectly, he is hinting that the current differences could have been handled if there was recognition that these were ‘intra public sector transactions’]

Government continues to be a privileged owner of enterprises in the financial sector – thus constraining the regulator’s effectiveness. 

He is right to reiterate his reservations on the Government ownership of the banking system inasmuch as it adversely affects RBI’s regulation of these banks. He endorses Urjit Patel’s comments in this regard.

The overall thinking in Government about reforms changed from the moment Raghuram Rajan Committee gave its recommendations in 2008; and Justice Sri Krishna Committee gave its report in 2010.  The influence of RBI on the general thinking on reforms changed and a new framework took its place.

[In the above comments, he leaves more unstated than state them. Justice Sri Krishna Committee’s recommendations were made in 2013, I think. I think Dr. Reddy is referring to the recommendations of the Financial Sector Legislative Reforms Commission. Or, it could be another Committee.]

The government by virtue of its role as a coordinator and at the same time as the owner of the regulated entities puts / makes the central bank and the regulators somewhat ineffective unless they are on the same wave length as the government. The financial intermediaries in banking, insurance and even non banking mutual funds, etc. continue to be dominated by the presence of public sector.  Hence, the regulators’ standard tools are ineffective. 

[A rather forthright comment by the former Governor. The votaries of public sector banking in the present ruling dispensation must take note of these observations.]

Under the new regime, the financial stability considerations are not explicitly taken into account. In regard to external sector also, the stability considerations are not explicitly built into the monetary policy objectives. Is there a danger that the advantages of in-built coordination available in full service central bank been foregone?  Is there an identity crisis because of the juxtaposition of the MPC in a full service central bank? 

[Dr. Y.V. Reddy has raised some very important questions here on the monetary policy framework, on the government-RBI relations, etc.]

The effectiveness of “independent” monetary policy is blunted by the criticality of government owned banks for transmission of monetary policy.

[In a sense, he is highlighting the incompatibility of independent monetary policy and government-ownership of the banking system]

The regulatory framework of banks is not neutral to ownership in the sense that governance of public sector banks continues to be determined by the government.  The fiscal authorities use the banking system to implement some of the government developmental programs and RBI as a regulator does facilitate the use of public deposits with the banks for pursuing governmental programs. 

[Dr. Reddy again reminds us of the complexity that the RBI has to deal with, given government’s ownership of the banking system and its fiscal and development imperatives.]

This speech is not yet uploaded on his website. Once uploaded, you will find it here.

Mysuru’s clean success

A good story and well reported too.

This is a good example of specific policy proposal or recommendation that experts should be putting forward.
Use case studies – successes and failures – for emulation. There are plenty of such stories from India itself.
The ‘India Today’ 43rd anniversary issue (Dec. 31, 2018) is a lovely collection of inspiring stories, of individuals who are making a difference for the better.
In the story on Mysore’s ‘cleanest city’ tag, two management lessons stand out:
(a) No layout plan is approved unless it comes with a waste disposal plan. (I guess a similar condition should be laid down on water self-sufficiency too
(b) The roping in of religious organisations and students to spread the message


A friend sent me this tweet of Shri. Rahul Gandhi and asked me for comments:

Here is my response:

Congress, under PVN, built India’s growth story on a set of policy proposals that were prepared before PVN took office.
Congress, in the 1950s, did not do a bad job. India’s growth was comparable.
Congress, in the Sixties and in the Seventies screwed up India big time, barring a year or two in between.
The war with China in itself was a colossal policy failure.
On the positive side, Indira Gandhi’s ‘Green Revolution’ was a good example. Her overture to Ronald Reagan on inviting American technology companies to set up shop in India opened the way for I.T revolution. But, her negatives far outweighted the one or two good initiatives – undermining of institutions, institutionalising corruption, reversal of Federalism, etc.
Congress in the 1980s – Mrs. Gandhi, on her return, did a decent job from 1980 to 1982 – initiated economic liberalisation. R. Venkatraman played an important role in that period, as the Finance Minister. Tried to weaken the iron grip of the State on the country. She lost her way from 1983 to 1984.
Rajiv Gandhi meant well and did a few good things from 1985 to 1987. Telecom revolution should be credited to him. Initiated de-licensing by allowing broadbanding of licenses; But, lasted only two years. Lost his way from 1987 until 1989.
So, out of the 67 years up to 2014, the Congress ruled for 54 years (not counting the United Front coalition years). Out of those, it provided decent governance (only) in some areas for about fifteen to sixteen years. These fifty four years include the five-year term of PVN Rao.
From 2004 to 2008, the Congress Party did not contribute to India’s economic growth. It rode the global growth wave and India’s growth was aided by an unsustainble investment boom facilitated by equally unsustainable capital inflows. These investments were largely unproductive too.
From 2009 to 2014, the costs of the unsustainable growth of the previous five years became manifest. They are still being felt and incurred by the country. Double-digit inflation and the collapse of the Indian rupee are but two of the testimonies.  Tax terrorism started from the budget of 2012-13 (and, unfortunately, has continued under this government, with greater vigour).
From 2014 to 2018, India suffered monsoon failures and global growth slowdown. India had to use the bonanza from the crude oil price crash to repair the country’s finances, left in utter disrepair by the previous government.
Demonetisation was not thought through thoroughly and implemented badly. Yet, it is possible that its long-run benefits outweigh the costs. Goods and Services Tax will surely be a long-run success story as is the Insolvency and Bankruptcy framework. Short-term glitches are inevitable in a big country such as this and some of the glitches are due to external technology support from private sector.
Formalisation of the Indian economy is sorely needed. This government has made crucial beginnings – in many important ways – in this largely unpopular task. 
The development of the Northeastern region of the country and its integration with the rest of the nation will have huge long-run dividends. For example, the recently completed bridge in Assam was 21 years in the making. In the first seventeen years, there was scarcely any progress on its construction!
In sum, based on track record, incompetence is a charge more easily attached to the leadership of the previous UPA government. There is empirical evidence.

NDA and rural India: the untold story

Excertpts from the lead article by Raj Chengappa in ‘India Today’ 43rd anniversary issue:

In the other key areas impacting rural progress, both the Central and state governments have thankfully learnt from past errors. Providing rural housing for the needy is one such. Housing programmes have been around since 1985, but their implementation has been tardy, and corruption rampant.

When the NDA government under Narendra Modi came to power, it rev­am­ped the programme and ren­amed it the Pradhan Mantri Awaas Yojana. The size of the houses to be built was increased from 20 square metres to 25 square metres and the grant increased from Rs 70,000 to Rs 1.2 lakh. But what was critical was how corruption was curbed using digital and communications technology. At the time of the payment of the first instalment, the recipient has to upload his photograph along with pictures of the plot of land his house is to come up on. Then, the person has to send photographs of each major stage of construction stipulated to get the next instalment. The subsidy money is transferred directly to the recipient’s bank account, ensuring it is not diverted. This has cut down corruption by local officials from 50 per cent to around 12 per cent. It has also seen a record number of houses being built in the past four years. One fallout: with no slush money coming to them, many of the panchayat-level officials are not pushing the programme too enthusiastically.

Another welcome development has been the move to integrate the various services under diff­erent schemes. So, under the housing scheme, a person can also avail of the subsidy for toilets under Swachh Bharat, get a cooking gas connection under the PM Ujjwala Yojana and an electricity connection under the rural electrification programme. With all money transfers going to bank accounts, the opportunities for corrupt officials to withhold or divert payments has been dramatically reduced. It remains critical to ensure that, having provided these amenities, the quality of service is not compromised. It is not enough to bring electricity poles to a village, there must also be quality supply of power. In subsidised LPG, cooking refills have to be made easily available and not given as a premium.

In the PM Gram Sadak Yojana, an important innovation is that, apart from building the roads, there is a built-in five-year maintenance contract the constructor has to abide by. He has no choice then but to ensure that good quality material is used for making the road. Some of the other government schemes have provided amazing results in the past too. When M.G. Ramachandran was chief minister of Tamil Nadu in 1982, he introduced the mid-day meal scheme. I had written an article about it for the magazine at the time, dismissing it as a populist scheme. But its impact turned out to be revolutionary. Infant mortality rates in the state began to drop significantly a few years after the scheme was introduced. Then the government cleverly extended it to pregnant mothers who came to drop their children to school. They were not only given a meal package but also medicines to ensure a safe pregnancy. It was followed up with post-natal care and benefits. That saw maternal mortality rates drop perceptibly in the state. And to the astonishment of social planners, Tamil Nadu’s total fertility rates began to fall significantly within a decade, reaching levels only achieved by Kerala.

Maternal care has been another success story. When I visited Rajasthan in the 1980s for a health story, only two out of 10 babies born were institutional deliveries. The other eight were delivered at home with the help of the rudimentary equipment used by traditional midwives or dais. Today, eight out of 10 babies in Rajasthan are born under institutional care.

Two observations:

(1) Much has been done by the NDA government to deliver on promises to the rural poor and rural India, in general. They hardly get highlighted.

(2) I appreciate Raj Chengappa’s honesty in admitting that he dismissed MGR’s mid-day meal scheme as a populist gimmick. This is typical of elites. They have far too little respect for politicians’ instincts and smartness. In the end, they (the elites) make the situation difficult both for those who govern and the governed. In other words, elites punch too far above their weight.

In any case, the ‘India Today’ 43rd anniversary issue is a collector’s item. There are many inspiring and inspirational stories. People who are toiling to make life better for those around them with not much expectation except the intrinsic pleasure of it. God bless them!