Friday, 3 February 2017

Not with a bang

Indian Express, 2nd February 2017

FM springs no surprises. Nor responds adequately to slowdown in private investment.

Budget 2017 took place under the shadow of demonetisation. What would the follow-up actions be, especially as the outcomes from demonetisation have been disappointing compared to its stated objectives? The budget has proved to be a quiet affair. We are left with relief that erratic actions have not been taken. At the same time, there were few steps that would address the biggest concern about the economy - the slowdown in private investment.

Before the budget speech, there were several scenarios which were being talked about. Would the budget propose other radical measures like a banking transaction tax or the removal of income tax proposed by Artha Kranti? Would the budget try to soothe demonetisation’s pain by sending transfers and tax breaks to the affected? Would the fiscal deficit be increased to alleviate its contractionary impact?

The demonetisation experiment was a negative shock to the economy. Some people were proposing that this should be offset by a fiscal expansion. The finance minister (FM), however, stuck to a modest fiscal deficit. This makes sense for many reasons. First, a larger fiscal deficit could have hurt India's credit rating. A fall in ratings could have lead to a flight of capital and a rupee crisis. Second, providing a fiscal stimulus would be tantamount to accepting that the negative demonetisation shock has consequences beyond the present quarter. This may not be something the government is ready to admit. In terms of providing a positive shock by expanding expenditure, the capacity of the state to spend funds effectively is limited. The budget speech did well in not announcing big subsidy programmes. There was a sharp increase in the expenditure of MNREGS. This may be consistent with the increased utilisation of MNREGS owing to demonetisation that appears in the initial data. It has to be kept in mind, however, that the prime minister’s speech on December 31 announced many traditional subsidy programmes.

The overall emphasis on subsidies is larger than meets the eye.

At a conceptual level, perhaps demonetisation and the associated political strategy is more about being anti-rich than being pro-poor. In the past, populism in India has involved inventing subsidy programmes that help the poor. This government has tried to make poor people happy by pointing to the distress of the rich. Perhaps this would imply that the budget would also take actions which could be positioned as being anti-rich, such as raising tax rates or avoiding reforms. There could have been a number of measures that fitted the bill, such as a wealth or inheritance tax. It is not clear what the impact of these would have been. The FM proposed a surcharge on income between Rs 50 lakh and Rs 1 crore.

When faced with economic difficulties, another way through which fiscal policy can be expansionary is to cut taxes. One long-standing area for Indian fiscal reform is bringing down the corporate tax rate. In Union budget 2015, the FM promised that the Indian corporate tax rate will be brought down to 25 per cent. One concern for not doing this for the corporate sector may have been the risk of being called pro-rich. Another may have been the uncertainty that removing exemptions could have introduced at this time. The rate could not have been cut for large corporates that contribute to most of the corporate tax collections, without removing exemptions, or it would have led to a dip in revenues, something the government cannot afford at this point.

A compromise has been achieved by proposing a lower, 25 per cent tax rate for small companies whose income is under Rs 50 crore per year. At a political level, this can be seen as reaching out to small businesses. One can also hope that they would help to improve compliance by smaller companies.

Similar moves are visible in personal income tax, where tax rates were cut at low incomes and increased at higher incomes. These moves are consistent with the populist, anti-rich stance. Respect for Indian policymaking capacity was at a low after demonetisation. Expectations for the budget speech were low. The pessimists expected an escalation of erratic measures crafted by non-experts. The prevailing mood seemed to support doing things that were bold and that no reasonable country had tried before. Fortunately, the budget did not propose a universal basic income, a banking transaction tax, a cash transaction tax or any other untested idea.

In terms of institutional reform, the budget speech was necessarily silent on the big story: The Goods and Services Tax.

A sound GST is one with a low single rate, comprehensive coverage and a single administration. Many compromises have already been made which ensure this will not come about. The extent to which a sound GST is delivered will have a major impact on the coming years.

On financial sector reform, some old policy initiatives are gradually going towards execution. The abolition of FIPB was long overdue and is a welcome step. The Resolution Corporation will deal with the failure of financial firms.

In summary, while the FM should be given brownie points for staying on the conventional path and not giving any big surprises, he also did not respond adequately to the serious slowdown in private sector investment India has seen in recent decades.


Monday, 16 January 2017

Reserved Bank of India

Indian Express, 14th January 2017

Demonetisation showed India's central bank is too opaque. Its decision-making must be open to scrutiny.

The RBI board's decision to recommend withdrawal of legal tender of high denomination notes after a short board meeting is seen as a loss of independence of the RBI. The recommendation was based on advice by the government that the RBI Central Board should consider such a decision. The RBI board was within its powers to turn it down. It could have directed the management to give it a report on the costs and benefits involved and taken a considered decision in its next meeting. Why did it not do so? Why could the government take the RBI board for granted?

To figure this out, we need to look at how the RBI Central Board normally makes decisions. As an example, we consider how the RBI Central Board decides the annual expenses of the RBI; a relatively important decision about spending public money. The RBI annual report shows the RBI’s annual expenses in 2014-15 were Rs 13,356 crore. These are comparable to the annual expenditure of many states in India, and many times bigger than that of most central banks and regulators in India and abroad. Nearly a third, or more than Rs 4,000 crore, is spent on RBI staff salaries, superannuation, housing, maintenance, directors’ fee and board meeting expenses. Such a large use of public money requires adequate scrutiny.

The board would discuss and approve the expenses and fulfill its role of controlling excessive expenditure by the management. However, there is no evidence available that the board even discusses this enormous annual spend of the RBI. Further, there is no evidence that the board looks after the public's interest in the event that there may be a conflict with the interests of the management. This is something the Board would have been expected to do. The decision seems to be taken mainly by the management - without the scrutiny of the Board.

How could such an arrangement be possible in today's India? The answer lies in the text of the RBI Act. In 1934, India's British rulers did not see a role for defending public interest which could be in conflict with the interests of the RBI management - the sections of the Act relating to the functioning of the Board have not been amended even after Independence. Through regulations made by the Board (Regulation 15 of the RBI General Regulations), the board created a "Committee of the Central Board" to which it delegated all its powers. The management may invite a couple of directors to meetings of the Committee, based on whichever directors happen to be in Mumbai at the time. This Committee can meet often and take all decisions that are then approved by the Board - in effect, the RBI Central Board has abdicated its responsibilities to the people they were supposed to have oversight over, that is, the management.

A normal governance practice is to create committees of a board with specific mandates and come back to the board for decisions, rather than take decisions. All decisions are taken by the board. In the case of the RBI, all the general powers of the Central Board have been delegated to the Committee of the Central Board - the Committee of the Central Board virtually can do everything that the Central Board can, under the RBI Act. This defeats the spirit of collective decision-making at the Central Board-level and circumvents the necessity of obtaining votes of the majority of members of the Central Board. The minutes of the Committee are placed before the Central Board; this serves little purpose as decisions are already taken and members did not participate in them. The Central Board effectively becomes responsible for all decisions of the Committee without deliberations - while the Committee has no accountability on how it discharges its duties.

The regulation that empowered this Committee to transact all the business of the Central Board was made in 1949. For decades, the RBI board has functioned in a manner in which it did not deliberate on the most important decisions of the functioning of the RBI. This suited the management, which did not have public accountability in this unusual set-up. The management's functioning has consequently become a black box with no scrutiny. The Board functions in a manner that would not be acceptable even for a private company as it would violate company law. Today, Parliament may find fault with the demonetisation decision and blame the RBI for not asserting its powers or the governor for not doing his job properly. But if the Board continues to function in this manner, the problem will remain.

A related issue is that of transparency. The RBI does not make the Board agenda or minutes public. This lack of transparency is not just about this episode, when an RTI enquiry about Board minutes was turned down. Even the minutes of Board meetings held five years ago are not made public. If the Board was required to make its proceedings public, would it have continued to behave in this manner or would public scrutiny have prevented such functioning?

This takes us to the question of what is gained by transparency. Why are the agenda and minutes for board meetings of regulators or central banks in India and abroad made public? In the minutes, only a few specific decisions, such as those related to specific companies or trade secrets that the law prevents regulators from revealing, are held back. The answer lies in the understanding that along with transparency comes autonomy. When participants know that discussions of the meeting will be made public, they, as well as those who may be sending letters or advice to the Board, behave more responsibly. This reduces the chances of the Board being pressured or taking hasty or irresponsible decisions.

Parliament must examine in detail the functioning of the RBI Central Board. The RBI must be required to make public minutes of all past meetings of the Central Board. The agenda of every meeting should henceforth be public. If there are to be any exceptions based on national security, it is Parliament that should decide. The Board must not be allowed to abdicate its responsibility. Unless Parliament amends the law and enforces a well-functioning Board, the RBI will continue to be a weak institution and fertile ground for further mistakes.


Friday, 9 December 2016

Crossing the chasm

Indian Express, 9th December 2016

When you wish to influence the behaviour of millions of people, consumers, businesses there has to be a change in the policy framework.

The RBI's Monetary Policy Committee wisely decided not to cut policy rates in its meeting on December 7. Though the economy has witnessed a sharp negative shock with a drop in consumer demand, a rate cut can do little to counter the shock of demonetisation. A policy rate decision is usually expected to have an impact on inflation in one to two years. By then, it is hoped that the impact of this negative demand shock will be over. Moreover, measuring the impact of demonetisation on inflation and the GDP is difficult as the story is still playing out. A bad, but not unlikely, scenario is that demonetisation increases uncertainty in the policy environment, and its effects go beyond the immediate demand reduction due to cash shortages. Consequently, it could lead to a postponement of investment revival by a few years making it difficult to forecast the GDP. Consequently, monetary policy-making too has gone into wait and watch mode.

The decision to keep the rate unchanged is also good as an attempt to improve public perception of the RBI. Demonetisation and its handling, as well as the RBI's insistence that the process was carefully deliberated, adequately prepared for, and that there is ample cash with banks, has undermined the public's confidence in the RBI's capabilities and its commitment to the inflation target. Deputy Governor R. Gandhi's statement after the monetary policy meeting raises, rather than answers, questions about the RBI's competence. Most are unconvinced that the RBI board's recommendation to the government to demonetise was based on independent and technically sound analysis.

As a way out of the shortage of cash, government and the RBI have appealed to the public to adopt electronic payments. Indeed, it increasingly appears as if that, rather than black money held in cash, was the main objective of demonetisation. One point often made in the current debate is the difficulty in doing so as half the Indian population is unbanked. This is an important obstacle in the adoption of electronic payments. The pertinent question, however, is: Why does half of India's population not have bank accounts?

Most of India lacks bank accounts because we have tried to apply a command and control approach to banking policy. The lack of a competitive banking system meant that banks themselves were not inclined to open rural branches and ask customers to open bank accounts. Instead, beginning with the nationalisation of banks, it has been a government initiative for many decades. Banks have been given targets. Pushing public sector banks to open branches, and then pushing them to open accounts for the poor has not been a successful strategy. We did not create a competitive banking system. New commercial bank licences have been rare, barely two per decade. Foreign banks are not allowed to open more than 20 branches a year.

No doubt, in these difficult days without cash, there will be some movement to digital payments. Growth figures, given today's tiny base, will look large. But even some of this may be temporary. Permanent adoption of electronic payment systems will depend on the ease of payments and the charges to be paid for these services. Government has made digital payments free till December end to alleviate the cash situation. At some point beyond that, payment service providers will be allowed to charge for their services otherwise they will shut down the service, killing the whole cashless project. It has been reported that Visa, Mastercard and RuPay will altogether lose Rs 1,000 crore in November-December. Regardless of the accuracy of the amount reported, this is not a sustainable model.

Electronic payments have to be easy to adopt. There are plenty of models around the world to learn from. In some countries today, person to person payments are generally made digitally. Having effectively blocked such payments so far by onerous KYC norms and other restrictions, even the young who had the literacy, the means and the attitude to adopt e-payments, have not done so to the extent desired.

Unless the RBI ensures that all electronic payment systems and e-wallets are inter-operable, we could be creating a monopoly. Today the payments regulator, the RBI, prevents a Paytm customer from paying a MobiKwik customer. This is unlike the TRAI that pushes telecom companies to accept calls that originate from other telecom providers. A telecom company cannot refuse to accept incoming calls and force the customer receiving the call to subscribe to its service. However, a payments provider requires the customer receiving payments to download its app and become a subscriber.

In markets with such network externalities, one of the service providers is likely to emerge as a monopoly, unless the regulator steps in. This is undesirable for a number of reasons. It could leave customers vulnerable to higher charges later, which may again reduce the adoption of digital payments. Second, it would reduce the incentive of the monopolist to constantly innovate as he will not be facing competition. Third, it will create systemic risk as it will make the system vulnerable to the health and electronic infrastructure of one provider. If the provider fails, the whole system can crash and again the economy can come to a standstill.

If the government wishes to push faster for a cashless economy, policy and regulation need to focus on competition and innovation. The RBI has been promoting bank-centric payment systems in an economy where banks don’t even compete to get customer accounts. It is no surprise that neither banking nor payments have spread to the entire population.

When you wish to influence the behaviour of millions of people, consumers, businesses there has to be a change in the policy framework from targets to one that works through incentives. In this case it has to be about incentives of banks, of payment service providers, of the payments regulator etc. Pushing the economy into cashlessness cannot be forced by putting Rs 2,000 notes in the hands of the public so that people use electronic payments from lack of choice, where card companies provide the service at a loss and where some wallets could emerge as monopolies, from sheer neglect or not putting a competitive policy framework in place. If we are moving towards the goal of cashlessness, a focus on technology and neglect of an appropriate competitive regulatory framework will be short-sighted. The policy framework must be based on competition, interconnection and consumer protection. Policy work and committee processes have been working on cashlessness for many years. This work needs to go into the government's next steps.


Friday, 11 November 2016

Show me the money

Indian Express, 11th November 2016

While the ban may address the problem of the stock of black money in cash, the question is will it encourage people to disclose all income and start paying taxes on it? (Source: Reuters)

The sudden and dramatic announcement by the prime minister banning Rs 500 and Rs 1,000 notes issued by the Reserve Bank of India has a number of objectives. Among them are tackling counterfeit notes, curbing black money and restricting finance for subversive activities. While progress will be made by suddenly making the present high denomination currency illegal, we need many more steps before the desired objectives can be fully achieved.

One of the main objectives of replacing old currency notes by printing new notes is to tackle the problem of fake currency notes in circulation. In India, there is fear that counterfeit currency is being used for financing terror as well as other subversive activities. If security features of the present notes are weak and there is rampant counterfeiting, there is a need to replace these with new notes that have better security features. Usually, this is done gradually. So, for instance, the RBI could have started issuing new Rs 500 notes, allowed old notes to be exchanged for new ones and issued a deadline after which the old notes would not have been legal tender.

This is typically the strategy followed by most central banks, who are, in general, in a constant battle with counterfeiters. Curbing counterfeiting of internationally accepted currencies like the US dollar, which is used all over the world for legal and illegal activities is supposed to be a constant challenge.

In India, the problem of fake rupee notes has been noticed for many years. It has been difficult to estimate the size of the fake notes in circulation. It is not known whether the counterfeiting is done in India or across the border. Currency notes with better security features are certainly welcome, though it is not obvious that such a sudden move would make a big difference to this objective. It could have been done slowly with banks not giving out old notes until the last hour.

Then, the objective of curbing black money. Black money is money that has not been declared as income to the income tax authorities. It is not necessarily obtained from crime or corruption. It may be acquired by not showing the output of a factory and not paying excise on it. All black income is not held in cash. For instance, it may be in foreign bank accounts. Similarly, all cash is not black income. Legitimate businesses deal with large amounts of cash. Petrol pumps, white goods dealers, textile merchants and jewelers often have large cash holdings by the end of the day with many consumers paying in cash.

Cash will either have to be exchanged by the holder at a bank himself or through someone. For some days, it will be disruptive for business. It would not be surprising if, in some time, a black market pops up to exchange old notes for new notes, thereby converting black money into white. This could be in the 50-day period in which the old notes can be exchanged with new ones. There would, no doubt, be a discount, if this happens.

But the ban will certainly hit those who are holding black money in cash. Corrupt bureaucrats, politicians and many more with piles of cash must be wondering how to handle the situation and how long to wait before they try to solve it. Since the present high denomination notes are going to be replaced by new notes, it is not that cash will no longer be used for corruption and storing black money - though it is likely that dollars, gold or diamonds could become more popular for such illegal purposes due to the fear of such a ban recurring.

However, while the ban may address the problem of the stock of black money in cash, the question is: Will it encourage people to disclose all income and start paying taxes on it? Or does that require simplification and rationalisation of the tax system? As long as agricultural income can be used as a route to avoid taxes and indirect tax rates have multiple rates and exemptions, the problem of tax evasion is unlikely to go away.

On the negative side, the disruption in transactions could hit the emerging growth of consumer demand. In 1978, India denotified the 1,000 rupee note, and nothing much happened. A black market sprang up, people who had these notes took a loss while selling off these notes to people who could claim these as legitimate income. At the time, those notes were 0.6 per cent of the cash in circulation. Things are more daunting this time as 85 per cent of the cash in circulation is in the old Rs 500 and Rs1,000 notes.

A monetary economics perspective is useful. In India, there is one concept of money supply for the formal economy (the total money in all banks) and another concept of money supply for the informal economy (the cash in circulation). We will have an 85 per cent reduction in money supply for the informal economy for some days. Money is the means of transacting in the informal economy - payments will be held up and purchases will be postponed.

Some see this move as a way of pushing the country forward towards a cashless economy. There are two problems with this perspective. First, it is not that high denomination currency notes will go away. The existing notes will be replaced by new notes. Second, the cashless ecosystem is not ready to support a whole range of new users; this push is premature. Those who move from the denotification of the Rs 500/1,000 notes will not take to electronic payments. Their quest could instead take them to new notes, gold, US dollars and the bitcoin.


Monday, 17 October 2016

Unprepared for bad days

Indian Express, 17th October 2016

India lacks the institutional mechanisms to deal with the death of firms and the failure of banks.

Bank credit to the industrial sector has started shrinking. Its decline has been a serious cause for concern as credit growth is essential to revive investment. However, the logjam is not a short-term problem. The problem's origins lie in the incomplete reforms of the last 25 years. We hoped for the best and did not prepare for the worst. We failed to prepare for the inevitable business cycle downturns that a market economy witnesses.

The inability of banks to lend to industry appears to have pushed them to lend more to retail consumers. This will, to some extent, help industry which has been operating at below capacity. The phenomenon may be helped further by a rise in the salaries of civil servants, a good monsoon and a pick up in public investment.

In a traditional market economy, one might have thought that a pick up in capacity utilisation will mark the beginning of a self-correcting process of bringing about an upswing in the investment cycle. At this point, when investment in the Indian economy has been declining, this would have helped answer the most difficult policy puzzle faced by the Indian economy. But this may not happen soon enough.

If the decline in bank credit had been only due to a lack of demand for credit, then an increase in capacity utilisation would have eventually pushed industry to further increase capacity and led to an upturn in investment. But if the decline in credit growth is due to high NPAs (non-performing assets) this may not happen. The magnitude of stressed and restructured loans suggest that the latter is a serious issue today.

If the reforms of 1991-1992 had clearly envisaged a move to a market economy that inevitably has booms and busts, the government should have, over the years, systematically put in place institutional mechanisms for dealing with the death of firms, exits, bankruptcy and failure of banks. At the same time, courts and contract enforcement would have been made stronger. Instead, a naive version of a market economy led to an institutional framework suitable for capitalism that only witnesses booms.

Now that we have been stuck in a logjam for a few years we are setting up an institutional mechanism to deal with bankruptcy and bank failures. However, it will be a few years before we can build these properly. Unfortunately, this means that the present situation will not be resolved quickly.

A critical reform that should have followed the liberalisation of industry should have been the development of a competitive private banking sector. Our phase of planned industrial growth was over. Why should the government have had a role in deciding which sector and which borrower gets how much credit? Surely, if the government had to genuinely allow industry to grow, it should not have been deciding who gets the money to grow and who does not. But this was not the case. On the one hand, the government continued to own banks; on the other it continued giving directions to all banks, public and private, about which sectors to lend and which were priority sectors.

Instead of moving to a largely private banking system, bank licensing policy seems to have been dominated by a reluctance to allow the share of private banking to increase beyond about a quarter of the banking system. There was an inconsistency between the vision of market-led industrial growth and government controlled resource allocation.

Similarly, banking regulation needed to move away from central planning mechanisms to one more appropriate for a market economy. It should have undergone a philosophical change, moving away from directing banks to invest in certain sectors to regulating and monitoring the risks banks take in the business of banking. Reducing this risk would have prepared the banking system better for the bust. Instead, banks piled on a lot of risk in the boom years. Many of those projects went bad in recent years. The banking regulator has tried to come up with an alphabet soup of schemes like the CDR, SDR and S4A. None of them has been able to solve the problems created by inappropriate regulation in the first place.

An institutional change that should have followed the 1991 reforms should have been setting up of a resolution corporation for banks. In a market economy with booms and busts, banks should be allowed to be set up and to fail. Today, we cannot shut down banks because there is no proper system to shut them down. Weak loss-making banks continue to need more capital. We forcibly merge them with healthier banks, making them weak as well.

What is the way forward? In a privately owned banking system, banks do the business of banking to make profits; they retain earnings and they expand their equity capital and grow their balance sheets. If they make losses and are unable to generate adequate profits and retain capital, they are shut down or taken over by banks who have the capital. In a government owned banking system banks cannot be shut down. The only way out seems to be "recapitalisation", or putting tax payer money into making up for the losses or loans not returned. The situation is fraught with problems. Banks are not willing to either recognise bad loans or sell off weak assets at losses. The regulator is willing to give leeway knowing that government has limited money to recapitalise loss making public sector banks. If banks are forced to recognise losses and government cannot put money in, credit would only decline further.

As long as the economy was small and business cycles were mild, we somehow managed. However, after 2000 we saw a doubling of GDP, very high growth, and then a sharp downswing of the business cycle after 2008. The antiquated pre-market institutional framework is not able to provide the mechanisms the economy needs to get out of the logjam. Policymakers have been looking for short-term answers.

This is the danger of looking for fixes when something is broken. The approach of "don't fix it because it ain't broke" towards India’s banking sector must be fundamentally re-examined.


Friday, 9 September 2016

A note for Dr Patel

Indian Express, 9th September 2016

The newly apponted RBI Governor, Urjit Patel (Express Photo By-Ganesh Shirsekar)

Urjit Patel has taken over as governor at a time when the RBI has, for the first time, been given a clear legal mandate to target inflation. Governor Patel, lead author of the flexible inflation targeting framework, is undoubtedly the most suitable person to give credibility to the new mandate. His biggest challenge now lies in leading the reforms through which the RBI can actually influence inflation.

Raghuram Rajan's key contribution was his firm commitment to inflation targeting as the objective of monetary policy. His term ended with the RBI being given the legal mandate for inflation targeting. Patel faces a much tougher task.

Why is Patel's job much harder? Until now the RBI could talk about price stability and it could respond to the inflation rate by changing the policy rate, but it was not held responsible for the outcome. A rise in CPI inflation could be explained by blaming fiscal expansion, demand for protein, bad measures of inflation, inadequate transmission of monetary policy and so on. What has changed now is that the RBI can no longer merely “explain” high inflation. If CPI inflation is higher than the target, it has to not only provide reasons for its failure to meet the target, but also propose remedial actions.

While today it is a challenge for the RBI to even influence bank lending rates, let alone the CPI, the inflation targeting mandate requires the RBI to ensure that it is able to do so. The amendment to the RBI Act in the Finance Bill 2016 that redefined the objective of monetary policy might have shifted the decision of setting the policy rate from being the sole responsibility of the governor to a committee process, but the Monetary Policy Committee only has the mandate of setting the policy rate. The responsibility of ensuring that changes in the policy rate get transmitted to the financial sector remains with the governor. It is he who will lead the RBI in managing liquidity, undertaking repo transactions, buying and selling government bonds and foreign exchange and ensuring competition in the banking sector so that the MPC's decisions get transmitted to markets.

Improving the transmission of monetary policy is no simple task. There are no easy recipes. For example, one necessary but not sufficient condition for obtaining financial markets that transmit changes made to the policy rate throughout the financial system is a deep and liquid bond market. The bond market in India is seriously limited by the lack of an independent public debt management office and restricted access to bond markets. This is an agenda that needs both legislative change and institution building. It needs cooperation between the RBI and government to make it work. Creating an independent public debt manager and the accompanying bond markets in which the debt office would sell government debt will be a crucial element in improving transmission of monetary policy.

In the next few weeks, a key element of Governor Patel's strategy will have to be communication. Communication to show his commitment to the inflation targeting framework will give it credibility. Rajan's legacy of regularly repeating the RBI's commitment to inflation targeting was in sharp contrast to the flip-flops in the speeches of some of his predecessors. Patel has to continue Rajan's legacy. While markets do assume that he supports the inflation targeting framework, speeches and statements emphasising his commitment to the framework will strengthen and consolidate it. This is particularly important in the present context when questions have been raised about elements of the framework.

Next, Governor Patel has to lay down, whether publicly or internally, a path of the financial market reforms he will undertake to improve the transmission of monetary policy. Some ground work has been done and recommendations are available in the form of the Percy Mistry, Rajan and FSLRC report. However, actual legislative and institutional reform is tricky and involves adept political manoeuvring. It involves negotiating both with the government and with RBI staff. Patel's experience as deputy governor should come in useful in playing this complex role. The task of negotiating the path of reform will be an enormous challenge.

Wearing his academic hat, Patel is known to emphasise fiscal discipline. A profligate government can make the RBI's job of inflation targeting much harder. While the bulk of the responsibility of fiscal discipline lies with the government, in India the RBI plays an important role. A necessary though not sufficient condition for the government to control its borrowing is the pain it should feel when the cost of borrowing goes up. This involves the goverment having to face markets that push up interest rates and punish governments for indiscipline. In India, the RBI, through the Statutory Liquidity Ratio (SLR), mandates that banks hold more than a fifth of their assets as government bonds. This provides the government with a captive market. Rajan laid down a path for reduction in the SLR. With Patel's emphasis on fiscal discipline, he could exercise the option of accelerating this path. This would be the RBI's contribution to pushing the government to show greater discipline.

Governor Patel's second biggest challenge will be how to solve the stress in Indian banking. An alphabet soup of restructuring schemes like the CDR, SDR, S4A has not succeeded. The Bankruptcy Code will not yield results in the next couple of years. It is said that almost any negotiated settlement by banks runs into fear of the 3 Cs — the CAG, CVC and CBI. As a consequence, public sector bank officials are reluctant to sign off on haircuts.

There is no easy way out. Patel, no doubt, understands the enormity of the challenges he faces. As an insider, he would know not just the problems, but also the difficulties that any simple solution poses. This, in itself, is an advantage.


Saturday, 30 July 2016

Dengue should be prevented and not merely tackled when the epidemic sets in

Indian Express, 30th July 2016

In India, prevention of dengue is left largely to households, while the government offers a cure. (Source: Illustration by C R Sasikumar)

As hoardings across Delhi indicate, we are waiting for a dengue outbreak. Aedes aegypti, the mosquito that carries dengue, is also the carrier of zika - and chikungunya. Just as in case of dengue, India will offer a fertile ground for zika - the deadly virus that deforms babies when it infects pregnant women.

The eggs of the aedes aegypti survive the Delhi cold, the heat and the dryness for more than a year. When the right temperature and moisture conditions come in late summer and during the monsoons, they hatch. The larvae live in freshwater in tanks, ditches, pots and planters all around us. Eggs laid by an infected female mosquito carry the infection. Soon the Delhi air will be thick with dengue-infected mosquitoes. Dengue cases will be on the rise till October.

It is not as if the problem or the solutions are not known. Countries across the world, including poor ones, have attacked the aedes aegypti. Communication campaigns about cleanliness, insecticide-laced mosquito nets and repellents, while important, are not enough. This is particularly so in the case of dense urban communities. The adult mosquitoes fly up to 400 meters. No single household will bear the cost of cleaning all containers and treating water tanks and coolers in its vicinity. Communication is often inadequate as a strategy. For example, it is advised that all water tanks be emptied, cleaned and refilled every week. How many households, given the water situation in Delhi, will be willing to empty out their tanks every week? If your neighbour does not kill the larvae in her tank, you can be infected with dengue. If you live in a student hostel, there is little that you can do. In other words, the prevention of dengue is a public good; it has externalities.

Experts emphasise government intervention and a multi-pronged attack on the aedes aegypti. Fogging is not enough as it attacks adult mosquitoes and not the larvae. Everyday now, larvae will be turning into pupae and then into adults. You cannot do fogging every day, nor is it safe or economical to do so. One important line of attack is to kill the larvae before they develop into mosquitoes.

Internationally, one of the most important interventions for dengue control has been larvicide or killing the larvae in various water bodies. Even if one imagined that somebody would do all this personally to prevent dengue, it is hard to imagine that people would allow someone to walk into their houses and put chemicals into their overhead tanks. That would not be safe as well. For instance, the dosage of temefos, a WHO-approved larvicide that can be added to potable water, must not exceed certain levels.

Clearly government intervention is required. Community participation is required, but preventing dengue cannot be left to communities. Governments need to have a strategy after studying the pattern of the disease and examining ways of attacking it. The prevention of vector borne diseases has been a clear case of intervention in public health all over the world.

In India, prevention of dengue is left largely to households, while the government offers a cure. It offers tests and hospital beds, a strategy that is not only insensitive when compared with the benefits of a public health prevention strategy, but also costly. A number of studies across the world have shown that intervention by governments through a strategy of prevention is cheaper compared to the government paying for the costs of tests and hospitalisation.

Unfortunately, the Indian health establishment’s prime focus has been on healthcare. There is an attitude of letting people get sick, and then thinking about how to setup healthcare facilities to treat them. From a public finance point of view, however, it is much better to engage in traditional public health interventions which emphasise public goods. In this case, the critical public health interventions are focused on mosquitoes.

We don't need to wait for newspaper stories about people dying of dengue in order to know that the epidemic of October is on its way. We will get a surge in October 2016. The time to act on these is now, and actions should be grounded in public health and not in healthcare. Unsystematic fogging or only cleaning riverbanks is not going to be enough. It is necessary to embark on comprehensive public health initiatives in July, instead of waiting till October and trying to deal with a surge of sick people using a creaking healthcare system.

Public health today barely accounts for 10 to 20 per cent of most state governments' expenditure on health. Healthcare accounts for 80 per cent to 90 per cent of such expenditure. From a financial point of view, however, healthcare is very inefficient when compared with public health. The effectiveness of public expenditure is dramatically superior when money is spent on well managed public health programmes as compared with spending money on well-managed healthcare. But public health requires a different set of skills. In the example of dengue, attacking mosquitoes requires the state to manage hundreds of health workers walking over every square metre of the area. Public health requires management skills to handle large forces of field workers who perform simple actions reliably. As part of the degradation of the India's state capacity in recent decades, we have become pessimistic about our abilities in public health. In despair, we have emphasised healthcare.

There are epidemics that ambush us, and there are epidemics that we can foretell. North India will have an epidemic of dengue fever in October 2016, as it does every year. The question is: Will we able to rouse ourselves, and have public health interventions ahead of time?

(This article first appeared in the print edition under the headline "Public health, not healthcare")