Deepak Lal: Small may be beautiful

India's reformers may take up this slogan for indirectly introducing market forces into the provision of both physical and social infrastructure.

In my last column I had promised to look at some alternatives to the centralised provision of physical and social infrastructure which is leading to the creation of a PPP cum Reservations Raj. The essence of these solutions is based on the recognition that the technocratic answer to the provision of this infrastructure based on the prevalence of economies of scale (as in electricity) or questions of equity (as in health and education) has manifestly failed in India because of its predatory State. As India is now governed by shifting coalitions of "rent-seekers", who are reluctant to embrace the privatisation which would remove the sources of these "rents", the only solution may be a relatively inefficient one in purely technocratic economic terms. This essentially legalises the informal provision of these services in what has been termed the informal private sector.

The basic model is that of the spread of cable television in urban centres in India. Private entrepreneurs in a locality set up satellite dishes, which provided cable TV services to subscribing households in the locality through cables provided by the dish owner. Barun Mitra of the Liberty Institute reports in the Heritage Foundation's 2006 Index of Economic Freedom on the local parallel private electricity grids being run in many parts of urban India. Shop owners in an area collaboratively set up kerosene or diesel generators to supply electricity to the 50 to 100 participating shops. The fee is based on the number of light bulbs connected for a certain number of hours each evening. Though the cost is much higher than if there was a reliable supply from the official grid, the shopkeepers can decide whether the higher costs are set off by the benefits from attracting customers during peak shopping hours. Similarly, at the officially unauthorised Sainik Farms in Delhi, without electricity from the official grid, private entrepreneurs have set up generators to create an informal grid. Of course, the cost per unit of electricity is many times that of official provision. But, in both cases the private supply, though more expensive, is more reliable than official supply.

All these examples show first, that public failures are being remedied""though at high cost""by private initiatives. Second, if the unreliable and inadequate public provision was to be replaced by efficient private provision through technically optimally-sized private generating plants and grids, there would be enormous gains in what economists call "consumers surplus". But failing both the provision of a reliable public supply and the current political feasibility of its privatisation, as a second-best solution it is desirable that these informal grids should be legalised. This might then lead, as has happened with the local cable TV systems, to a takeover of the inefficient smaller informal systems by private entrepreneurs, who can create larger private grids in competition with the public system. Of course, in time as the price of fossil fuels continues to rise, at some price solar cell technology will become competitive. The gargantuan public system of provision would be under serious threat, as has happened with the development of mobile telephony and the pressures that has put on the previous state monopolies in providing telephone services.

Similarly, in the provision of public health and education, the Indian state's failure is manifest. As the work of James Tooley and his associates has shown, the poorest in India are overcoming this failure in providing quality education by turning to private education. On some estimates, about 50 per cent of the poorest children in urban areas are in neighbourhood private schools run by charities and private entrepreneurs. Similarly in health, nearly 80 per cent of the overall health expenditure of 6 per cent of GDP is on private health care. Thus, India has succeeded in turning J S Mill's principle on merit goods on its head. Mill had maintained that for health and education there was a case for public financing but not for public provision of these goods. India has essentially moved to a system where both these merit goods are privately provided and funded. Rather than ban or discourage such private provision, at least the incremental public resources being put into these areas should no longer go to the defunct public systems, but should instead be transferred to the poorest to finance these merit goods through some system of vouchers.

In its approach paper for the 11th plan on education, the Planning Commission has rightly advocated this voucher system, which would make parents' entitlements reimbursable to both private and public schools chosen by parents for their children. If adopted, not only would the increased competition elicit higher quality from the currently low-quality schools even poorer parents shun, it would also mean that the rush to force reservations on high-quality private schools in the name of equity could be converted into a more efficient instrument for providing genuine ladders of opportunity to the economically or socially disadvantaged.

If such voucher schemes were instituted for both health and education, many more charities and private entrepreneurs would find it possible to set up schools, dispensaries and hospitals, which provide higher-quality services than currently provided by the public sector. There are obvious problems""including fraud""in setting up such voucher schemes and confining them to the poor and disadvantaged. But, however imperfect, the system of ration cards, which gives the poor access to the public distribution system, and the voter registration cards, which allow citizens to exercise their franchise, could be suitably modified to identify and give the section of the population categorised as poor, access to the voucher system.

In the 1970s, "small is beautiful" became a slogan for the invention and adoption of an intermediate technology between traditional indigenous technology, which was inefficient as it used both more capital and labour than imported capital-intensive technology to produce goods. This rightly ran into the sands. The time may have come for India's reformers to take up this slogan for advocating a decentralised organisational form, which by indirectly introducing market forces into the provision of both physical and social infrastructure, might be able to sidestep the roadlocks that have been placed by the Left on the essential second-generation reforms required in theses areas. They might also thereby mitigate the economic distortions that the coming PPP-cum-Reservations Raj is certain to cause.