Smart welfare in India

Another post on my writings, categorized by topic – here, welfarism-related government policies. Will attach four pieces here – three of them from Mint, written with my friend and co-conspirator Rajeev Mantri, and one from WSJ India Journal.

1. The Biggest Public Union in the World

…within the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), there is a need to separate the infrastructure and employment creation aspects. If building better infrastructure needs large machinery and contractors, so be it. All contractors could be required to pay villagers at least the program’s current wage. But then what will happen to the jobs?

This problem can be solved by giving all the villagers an “opt-out” clause of getting, say, half the wage by not working at all. This opt-out could be contingent upon the family’s children being in school, being vaccinated and so on. That would partially convert this make-work program, without much political opposition, into a conditional cash transfer program, an idea that has been very successful in Latin America.

Indeed, such an opt-out already exists in the form of unemployment compensation within MGNREGS. If within 15 days of applying for work, the villager does not get hired under the program, he is entitled to one third to one half of the wage without working.

But since the federal government funds the entire wage expense, and forces the states to pay the entire unemployment compensation, states have just added MGNREGS workers instead of paying unemployment compensation. Federal funding of wages and unemployment in the same ratio would automatically incentivize the states to save money by paying out “unemployment compensation” in those villages where currently projects are not needed or viable, and hiring contractors and villagers only where genuine infrastructure projects are needed.

Many villagers would gladly not do hard physical labor in exchange for half the wage. Finally, if some states want to pay higher than the current wage, they can but they should not expect the central government to fund the difference….

2. Making lemonade from lemons – The Food Security Bill (FSB) edition

…combine full-blown Foreign direct investment (FDI) in multi-brand retail with a comprehensive food security program. A political consensus is emerging on direct cash transfers – the Finance Minister announced in this year’s Budget speech that Nandan Nilekani-led Unique Identification Authority of India’s (UIDAI) blueprint to facilitate direct cash transfers of subsidies for kerosene, fertilizers and food had been accepted.

At its National Executive meeting held in Mumbai recently, the principal Opposition party Bharatiya Janata Party (BJP) has also endorsed cash transfers, going so far as to urge the Centre to assist farmers in opening bank accounts and transferring all subsidies directly.

Building on this broad political consensus, the Union government could design a comprehensives program that provides food security to India’s masses in the form of food stamps that can be encashed not just at government ration shops but also at modern retail chains and supermarkets built by global and Indian retailers. Such food stamps could be used to buy groceries, grains and packaged food at any shop, private or public.

Any fraud or misuse of food stamps can be prevented by leveraging the Unique Identification Number (UID) program to target subsidies effectively – the benefit could even be delivered electronically via smart cards. The program should include supply-side reforms as well – as economist Bibek Debroy has noted, government-imposed restrictions on production and marketing of agricultural and food products via Essential Commodities Act, 1955, the Agricultural Produce Market Committee (APMC) Acts at the state-level and the system of minimum support prices all need to be assessed in unison when looking at the issue of food security…

3. Making lemonade from lemons – The Right to Education (RTE) edition

…lemon-to-lemonade possibility is within the reimbursements promised by the government for the 25 percent of reserved seats in private schools. If the refunds – which are to be linked to average per-student government costs – are higher than the school’s fees, we already have a de facto voucher program!

This is what Swaminathan Aiyar had already noticed, but the problem was that for most elite private schools, this government transfer would still be a pittance. For the budget schools on the other, this could be a windfall – except that most of them are not recognized, and after RTE’s requirements of high salaries and full playgrounds, even fewer are likely to satisfy the regulatory requirements.

This is where Gujarat’s recent game-changer comes in, as documented by Parth Shah of the Centre for Civil Society. School recognition in that state will now be contingent on more sensible factors: Learning outcomes (absolute levels of student learning, and improvement compared to past performance) – 70 % weight; Inputs (including facilities, teacher qualifications) – 15% weight; Non-academic outcomes and parent feedback – 15% weight.

Under this formula, most budget schools are likely to become recognized, and hence eligible for RTE’s “eminent domain” – but with a compensation very favorable to them. Look out for better educational results, more empty government schools (and better bang for the buck for taxpayers) if this remarkable model is replicated by other states. Indeed, concentration on outlays and not outcomes has been the bane of most Indian public policy – the vast portion of government schooling expenditure in India has been on the salaries of the teachers and administration.

Unions have been “the biggest barrier” to reform, according to Abhijit Banerjee, an economist at MIT. Therefore, today it is increasingly true what Pranab Bardhan had noted in a larger context that “the left, while talking about the ‘dictatorship of the proletariat, has given us instead the dictatorship of the salariat'”. Government teachers, like most Indian public servants, have no incentive to perform because of job security and lack of performance pay….

4. India’s (incipient) socialized medicine

…now the Rashtriya Swasthya Bima Yojana (RSBY) is being pushed on a bigger stage. The Unorganized Workers Social Security Act 2008 further extends this scheme, along with other life insurance and pension schemes, to large parts of the non-
Below Poverty Line (BPL) population. The National Advisory Council wants to expand the RSBY into a National Health Entitlement Plan that guarantees universal free access to both in-patient and out-patient care (currently, the RSBY is limited to the former).

This could have severe fiscal and growth implications down the road. Therefore, we are compelled to dig deeper into the incentives within RSBY which is not very dissimilar to the “managed healthcare” idea of health exchanges and maintenance organizations. Today, the benefits are limited to Rs 30,000 and future increases are likely to be steep because of political pressures.

Moreover, while the scheme does try to balance the insurers and the hospitals by pitting them against each other to prevent misuse of funds, there is not much incentive for the average citizen to compare various insurers. Instead, the government should insist on a minimum-coverage plan, define a premium support (say Rs 800), and let various insurers compete on both price and coverage.

If some insurers can cover more than what is mandated for Rs 800, even better. If they launch a minimum coverage plan costing Rs 600, then let the BPL citizen buy that if he so wishes – and let him pocket the remaining Rs 200 or a significant fraction of it. And if there is a more comprehensive plan worth Rs 900, let the poor “top up” with Rs. 100 more.

Moreover, all hospital pricing should be negotiated strictly between the hospitals and the insurers. Recent government moves to fix prices for certain procedures is a retrograde and unnecessary move, which will increase, not decrease, inefficiency and corruption. If the NAC is against direct cash “doles”, as some members have said they are, they can consider the option of Health Savings Accounts where unused premia can accumulate, possibly tax-free…