PolicyWTF: Band-aids for Bullet Wounds
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
- Pranay Kotasthane
The ongoing political crisis in Ukraine has a small sub-plot that links to India’s education policy self-goals. Before the current crisis unfolded, I had heard that Russia and Ukraine were popular destinations for aspiring medical students from India. What I didn’t know was how big this cohort is in Ukraine. Multiple news reports claim that there are nearly 18,000 of them in Ukraine alone. Apparently, Indian medical students are also opting to study in Bangladesh, the Philippines, and Kyrgyzstan besides Russia and Ukraine.
Of course, these students are merely responding to incentives. Commonly understood reasons for students taking up courses outside India are the limited number of seats in government medical colleges, and higher costs in private medical colleges. Ask anyone about MBBS education in India, and they will launch into a tirade about how the “commercialisation” of medical education has turned it unaffordable.
But as readers of this newsletter would know, price is just a signal of the underlying market conditions. And so, fixing prices cannot be done by price-fixing. In this particular case, higher prices are due to the low supply of undergraduate medical seats. Apparently, 88,120 seats are on offer every year. For reference, there were 2,86,000 undergraduate seats in China. A good 40 per cent of these seats are in government colleges where the fee is subsidised by the taxes Indian citizens pay, while the remaining 60 per cent are in private colleges where the fee can range from ₹18 lakhs to ₹30 lakhs a year. The demand outstrips the supply by quite a margin and hence the high prices.
Had the market for seats been liquid, many more colleges should have sprung up and brought the prices down. Since there are nearly 600 colleges in India now, collusion by all of them can be ruled out. But clearly, this hasn’t happened, for two reasons.
One, unreasonable restrictions for setting up medical colleges. Until 2019, the regulatory authority for this sector was the Medical Council of India (MCI), an organisation that regulated both medical education and practice. Run by doctors, increasing the supply of doctors wasn’t their highest priority. After all, which beneficiary wants to reduce the “elite-quality” of their professions? Setting up a college meant pleading with this regulator and complying with their conditions like owning 20 acres of land and running an attached hospital. Colleges had to justify their student intake and were evaluated on the basis of things like the size of the “auditorium-cum-examination” hall, classroom sizes, and of course the student fees. In short, all the perverse incentives dutifully put together to create a rent-seeking apparatus par excellence. Corruption rose. Only politicians who could stare down the regulator risked starting new colleges, and the rest stayed away.
Two, the existing medical colleges are dwarfs. In recent times, the number of medical colleges per se has increased handsomely, albeit from a low base. In a Lok Sabha reply, the union health ministry said that 132 medical colleges in the government sector and 77 medical colleges in the private sector have been approved by the NMC/MCI since 2014, an increase of 72 per cent since 2013.
However, the intakes of these colleges continue to remain low. While the number of undergraduate medical seats in China are nearly 3.5 times those in India, the former has far fewer medical colleges — 420 (2018 figure) as against India’s 596 (2021 figure). So, India now has the largest number of medical colleges in the world and yet isn’t producing nearly enough doctors.
The private colleges that pick up the gauntlet prefer to stay small rather than grow. The reason: regulations disincentivise scale. If you were to visit the webpage for starting a new college, you will find five different compliance categories. Depending on whether you admit 50, 100, 150, 200, or 250 students, the regulatory requirements keep scaling up. All the rules mentioned in the previous point — such as hospital seats, number of examination halls — need to increase correspondingly for the student intake to increase. Those who can, set up another college instead. Those who don’t, are conservative with the student intake.
And of course, what is regulation without a price cap! Fees for 50 per cent of the seats in private colleges are capped. There are only so many people in the other 50 per cent who will cross-subsidise the rest. Even 10 per cent of seats going vacant dents profits significantly. So, colleges prefer doing laghu-udyog.
And so, we continue to regret that India falls way below the WHO-recommended target for doctor density. Despite the miserable status quo, the policy community in this sector is unable to confront the trade-offs. Most people think the solution is simple — the union government must establish more medical colleges. They discount the fact that the size of the problem goes beyond the capacity of the government — fiscal and administrative. Enlisting the support of the market is necessary for India to have a shot at meeting the doctor deficit.
There are a few solutions that go against the grain. Dr Devi Shetty recommends introducing undergraduate medical education in private hospitals using a problem-based learning approach. The government has also suggested a two-year bridge course for AYUSH doctors. Whatever the merits or flaws with these solutions, it is difficult to budge the policy orthodoxy.
Like for farming and defence services, debates on healthcare professionals acquire moralising undertones quickly — “commercialisation” becomes evil and economic reasoning is deemed inapplicable. The fear of a poorly trained doctor misdiagnosing patients is used to dead bat any solution for liberalising medical education. Addressing this concern requires strengthening the regulation of medical practice, not smothering medical education.
And so, we continue to be stuck with the status quo. Second-order effects follow. The scarcity of seats generates a huge demand for coaching institutes that can help crack entrance exams, further increasing costs for students. Some states opt out of entrance exams unable to fix the underlying scarcity. The problem doesn’t go away.
If we are serious about changing the status quo, a radical liberalisation of medical education in India is the only option. The problem of ‘bad’ commercialisation can only be solved by more liberalisation. All other solutions are akin to putting a band-aid on a bullet wound.
(Thanks to three friends who understand the healthcare sector much better than me. Mistakes are all mine.)
India Policy Watch: Public Ka Paisa
Insights on burning policy issues in India
— RSJ
Public finance is complex to understand. How the government earns revenue, what principles it follows to allocate its funds among various constituents that are fair and productive, how it distributes its surpluses etc. The list is long. All sorts of frameworks are used to figure this out. Pranay has often written on this topic in previous editions.
A more fundamental question on public finance that doesn’t get covered is this. Who does the money belong to? I mean, of course, it belongs to the government. But where did it get this money from, to begin with? I guess the simplistic answer is it earned money from providing services to its citizens and taxing them for it. Then it built up the surplus, invested the money in creating assets that generate good returns, improved the productivity of the citizens that in turn helped in increasing revenues and this continues nicely so long as it keeps its expenses below its revenues. As we see all around this isn’t as easy for any government. Over time it spends more than it earns and creates a deficit. Then it goes into debt to bridge this gap. If that isn’t forthcoming, it prints more money. All of which is like taking a loan from future generations. And this sort of a giant Ponzi scheme of borrowing fresh money to pay past debt continues. Someone will be left holding the can in distant future. But who cares.
All this is quite intuitive.
What’s the point of this preamble, you might ask? Well, the two topics I cover today are related to this. In one instance, there was quite surprisingly no “can” to hold for future generation for previous government’s excesses. Instead, there was a prize. So, if the future generations usually hold the can, do they also hold on to the prize in the rare event they get that? We’ll see how that goes. The other case is about where’s inflation in India? And how will the government meet its borrowing targets for the new fiscal?
Your Friendly Neighborhood LIC Agent
To begin, consider this.
You live in a nice, middle-class neighbourhood (the real middle class, not the gated variety). One of these days a nice, dependable sort of young man arrives. He’s a do-gooder sort. He helps with community issues, plays with the kids, tutors them in his spare time - you get the picture. A couple of years later he claims he can help manage your savings. He is open and transparent on how he will do this in a prudent and conservative manner. He will take money from people in the neighbourhood, pool all the funds together and he will invest it. He will earn a 5 per cent commission on whatever surplus he generates for you. You have seen such charlatans before so you’re careful. But you know this nice man. You have come to trust him so all of you decide to give part with some of your savings.
Turns out he is true to his word. He takes a small part of your savings and he keeps investing it every year. He is good at his job. He gives you a stable return. Not spectacular but you never lost any money. He’s a safe pair of hands who delivers.
Every year.
This goes on.
Not for one, two or three years. But say for 60 years. He is that one dependable presence in your lives. Though much older now. He now has a huge pooled fund that he manages. He keeps distributing modest and stable returns every year. But after giving all of you those returns, there’s a large surplus that’s sitting with him.
How did that happen? Well, there are reasons. He’s been conservative in how much return he gives you when the times are good because he thinks there might be tough times in future. Indeed, there were a few bad years in between. But they were never as bad as he had anticipated. So, over time that corpus gets built up. Also, many who invested at the beginning are no more. Their kids have left the country. They haven’t come back to claim the money. Others have left the neighbourhood and probably forgotten they made a small investment all those years ago.
You get the picture. This old man is now sitting on a large amount that’s unclaimed by anyone. But he’s 85 now. He wants to sell this business to someone, hand over a tidy sum to his daughters and retire to the Himalayas. So, here’s the question: how should he treat that large unclaimed amount?
Should he:
a) distribute this unclaimed amount to all his current and past customers who have helped build his business over the years? After all, these customers took the risk of investing with him and the upside should be theirs. It is their money as a group.
Or,
b) add this unclaimed amount to the regular business that he’s selling to new owners. Why? Because this is the upside of him doing the hard work of running this business and giving steady returns over so many years. Nobody should grudge him this because he’s never defaulted on any of his promises. Whatever remains after that is his. So, he takes the sale proceeds for himself and retires.
Or,
c) keep the unclaimed amount as-is. Tell the new owner this is a separate amount and this has to be kept the same way for a rainy day in future. This is a conservative option but this doesn’t solve the problem of the unclaimed amount. It only kicks it down the road.
Now, read this:
“State-owned insurance company LIC filed its Draft Red-Herring Prospectus (DRHP) on Sunday. Noteworthy among the risk factors mentioned by the corporation was the splitting of the single ‘Life Fund’ into participatory and non-participatory funds. This will, however, have a positive impact on LIC’s valuations as it approaches the primary market.
Let us start with participatory and non-participatory policies. Under a participatory policy, a policyholder can get a share of the profits of the company. This is received as a bonus. Examples of such products offered by LIC include Jeevan Labh and Bachat Plus. No such sharing of profits happens under non-participatory products, which under the LIC fold includes policies such as Saral Pension and Nivesh Plus.
As all insurance companies do, LIC also reinvests premium monies that policyholders pay. The profits or surplus that comes about as a result was till September last year held in one single fund. This was the Life Fund. The surplus was divided in the 95:5 ratio between policyholders (in the form of bonuses) and shareholders (which is the Government, in the form of dividends).”
In summary, LIC is that dependable old man.
It is a state-owned company that’s over 60 years old. It has been selling investment products (with a small insurance component) to its customers and it has built up a surplus pool. In one surplus pool (participatory policies), the profit is shared between the policyholders (customers) and LIC’s owner (Government of India) in the ratio of 95:5. In another pool (non-participatory policies), the surplus need not be shared between the shareholders and policyholders. Why? Because here LIC promises some kind of guarantees to customers on their investment and so long as that is met, the surplus belongs to shareholders. And in the same way, if the guarantees were not to be met, the government would have had to pay from its pocket to meet the obligations. So, the risk and rewards are symmetric.
Through an amendment now the government (owner of LIC) has decided the entire accumulated surplus pool sitting with it can be transferred to this non-participatory pool. That’s one move. This move then enables the government as a shareholder of LIC to transfer that surplus to shareholders; current and future. And apart from this transfer, it appears LIC has valued the equity component of this surplus (that is the part that’s invested in shares of public companies) at the current market value. In finance speak, the equity component of the surplus has been marked-to-market.
How much is this surplus pool and where has it come from?
Well, LIC has run for over 60 years. Customers have left without taking their money, some have died and no one has claimed the amount and LIC has been prudent in paying out annual returns to its customers and building a surplus for a rainy day ahead. How much is this amount that LIC has transferred to the book that’s now attributable to the shareholders? Around ₹4 trillion or ₹4 lakh crores. That’s what it looks like. Mind you, there’s nothing illegal here. There’s an amendment made and it is perfectly fine to then transfer the surplus to shareholders after that. And it is also fine to mark-to-market the equity component.
But then we go back to the original set of three questions I raised about the old man’s business. Now ask them for LIC.
Should it:
a) distribute this unclaimed amount to all their customers who have helped build LIC’s business over the years? After all, the customers have taken the risk of investing with them and the upside should be theirs.
b) claim this unclaimed amount to itself and its shareholders. It becomes a useful tool to sell its IPO as an attractive proposition. Nobody should grudge them this because they have never defaulted on any of their promises. This is the upside of them running the business and giving steady returns over so many years.
c) keep the unclaimed amount as-is. Tell the new shareholders this is a separate amount and this has to be kept the same way. This is a safe option but this doesn’t solve the problem of the unclaimed amount. It only kicks it down the road.
The answer based on the LIC IPO is b).
I don’t know if there’s a right answer here.
But I have a feeling many policyholders may ask why not a)?
It goes back to that question that’s not often asked in public finance. Whose money is it to start with?
That brings me to the other point I wanted to cover.
Where Is Inflation?
We had the inflation prints of January come for India and the US last week. For the first time in over 30 years, we now have five consecutive months where US consumer inflation is higher than that of India. The US reported a consumer price inflation (CPI) of 7.5 per cent for January ‘22 while the corresponding number for India was 6 per cent. It looks like this trend will continue for the entire year.
So, what should we make of this? I mean leaving aside the usual chest-thumping in some quarters on how this shows the current government is managing the economy better than the Biden administration. There are five key points for us to consider.
One, the US inflation is being driven by three factors. The huge fiscal stimulus they gave their economy during the pandemic. Broad estimates suggest the total stimulus was about 25 per cent of the US economy. This has meant significant liquidity in the system. That coupled with supply chain bottlenecks that still afflict the global trade system and an almost full employment scenario means there’s more money chasing fewer goods in the US. Housing prices are high, petrol prices have gone up and consumption is up by 10 per cent last year. So, inflation. The Fed (US central bank) has no option but to raise interest rates to make money ‘costlier’ and reduce the liquidity in the system. Not taming inflation will hurt the Biden government politically. And like we have often said before, inflation is the worst kind of tax on the poor.
Two, the inflation outlook of the RBI in India is fairly benign. They expect it to be about 4.5 per cent next year. What explains this? Beyond all other rhetoric, the problem in India is demand. Private consumption which has been the primary driver of the Indian economy in the past decade is still at pre-pandemic levels. People aren’t spending enough. Maybe because their incomes aren’t growing and that’s because the economy isn’t really growing at a macro level. So, all the song and dance about stock markets, unicorns and wage inflation among techies aside, the aggregate numbers tell us we aren’t spending enough. And this despite the supply chain bottlenecks and higher liquidity environment that we are in which should lead to inflation in usual circumstances.
Three, because of this the RBI doesn’t want to cut rates. The RBI came out with a very ‘dovish’ outlook in the MPC that concluded last week. Behind all the technical jargon, the message was this. We aren’t growing fast enough and we see the ‘recovery’ after the pandemic tapering off soon. The RBI spoke of the multiple indicators that suggest a slowing down of momentum in post-pandemic recovery - sale of automobiles, tractors, capital goods and fall in purchasing manager’s index (PMI) scores, all leading indicators of economic activity. So, RBI will continue to be as accommodating as possible to spur growth. RBI believes it is not behind the curve on this while most of the market thinks otherwise. The broader point about the recovery being weak and ‘k-shaped’ has been made in our past editions multiple times. There’s an underlying weakness in the economy that has to be addressed by first acknowledging and then working on it.
Four, there’s a scenario in the next six months where the RBI will continue to hold interest rates in India while the US may have multiple rate hikes that could add up to between 75-100 bps (100 bps = 1 per cent). This means the gap between interest rates in India and the US will come down materially. Usually, this means spillover and volatility risks of the dollars flowing out of India and hurting the INR exchange rate. The RBI seems to be comfortable that it has healthy forex reserves, a narrow current account deficit and continued inbound investment flow that can cushion this risk. We will have to see how long this comfort lasts.
Finally, the RBI has a task on its hand to manage this huge borrowing plan, remaining dovish to not scuttle even the weak recovery on hand while managing the risk of a narrower rate differential between India and the US. And the government has to find ways to service the ever-increasing interest burden of its debt while staying on course for the ambitious capex plan it has laid out. The borrowing programme based on the budget presented is to the tune of Rs. 15 lac crores in the coming year. Managing this requires a lot of skill. Whatever it does, there will be more debt in its books.
That brings us back to that question again.
Who is footing the bill for this? Whose money is it?
Matsyanyaaya: Aap Hamaare Hain Kaun, Russia?
Big fish eating small fish = Foreign Policy in action
— Pranay Kotasthane
As Russia-Ukraine tensions threaten to reorder international arrangements, the question Aap Hamaare Hain Kaun, Russia? has gained renewed importance. “What does a worsening relationship between Russia and the West means for India’s strategic autonomy” has been a theme that’s dominated the mental bandwidth of India’s strategic community over the past month.
The choice for India should be obvious. If it has to pick between the US and Russia, the convergence with the US on all three parameters — interests, values, and capacities — far outweighs Russia’s importance to India.
Yet, three objections persist.
The first argument is that a strong relationship with Russia is necessary for India’s strategic autonomy. Without this partnership, the fear is that India will become a mere pawn in the hands of the US.
I vehemently disagree. Strategic autonomy is a function of power. And to gain more power, it's better to partner with a stronger partner who can build your capability. Even if it leads to a loss of tactical autonomy, it is better than betting on a weaker partner like Russia. To side with Russia just for the sake of proving one’s independent credentials is the precise opposite of ‘strategic’ thinking. Rajesh Rajagopalan puts it bluntly here.
“The argument that India’s strategic autonomy requires it to maintain high levels of political and defence relations with Russia is particularly thoughtless. Strategic autonomy is an objective of foreign policy, not a doctrine. As an objective, the question to ask is — which policy helps increase India’s strategic autonomy? In a complex international environment, for a relatively weak power, the answer requires picking among bad, unappetising choices.
A China-dominated Asian order, which will be the consequence of Moscow’s efforts to undermine the US, can hardly be conducive to India’s strategic autonomy. Refusing to deal with the deepening chasm in India-Russia relations will not make it go away, it will only make the fall that much harder.”
The second objection is even more ideological. The old guard in the strategic community of India has a soft spot for Russia. Soviet Union helped India in the 1971 war while the US backed Pakistan, and Russia has been a reliable partner through thick and thin for India, while the US hasn’t, are the arguments put forward in support of this line of thinking.
I again disagree. To explain why, consider this initial framework for assessing the reliability in international relations. This framework assigns reliability perceptions based on the impact of state X’s actions on India’s interests. Each quadrant assigns binary labels to the state based on its chosen strategy.
The strictest condition for reliability is when a state takes a self-harming action in India’s interest (lower-right quadrant). For many, the Soviet Union met this criterion by deploying destroyers and submarines in the Bay of Bengal to ward off the US Task Force 74 during the 1971 war. What’s forgotten is that four months before the war, India and the USSR had signed an Indo–Soviet Treaty of Peace, Friendship and Cooperation. India had effectively allied with the USSR. USSR’s actions were thus at best reliable in a much looser sense (upper-right and lower-left quadrants). We should get over this fiction of Russia being India’s super-reliable partner. Especially in today’s situation when it is a much weaker partner heavily dependent on India’s foremost adversary.
The third objection is a realistic one. Since India is heavily dependent on Russia’s weapon systems, it cannot let the relationship worsen in the short term. I agree with this framing. While the short-term options are limited, the immediate implication is two-fold. One, diversify the trade relationship with Russia so that India can deter Russia’s denial of access to defence equipment by quid-pro-quo. Two, reduce dependence on Russia by buying from partners with whom India has a broader partnership. This is a point Nitin Pai has made for many years. In his words:
The fundamental challenge remains that our relations with Russia are massively concentrated on defence trade. It is best to purchase defence equipment from a country with whom we have broad and deep trade relations; failing which, to try and build such relations with the country we’re buying arms from. Russia falls into the latter category. Yet, bilateral trade has remained around $10 billion for years, with the balance being in Russia’s favour. India trades more with Venezuela, Belgium and South Africa.
In short, Russia is important to India for an instrumental purpose alone. No permanent friends, only permanent interests, and all that.
HomeWork
Reading and listening recommendations on public policy matters
[Video] Pavan Srinath on the need to liberalise medical education
[Articles] Read these two opposing viewpoints in ThePrint on India-Russia relationship by Rajesh Rajagopalan and Andrew Korybko.
[Article] How we fixed the Ozone Layer, by Hannah Ritchie for Works in Progress is fodder for a solutionist.
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