Sunil Jain: Wonky and other ideas

RATIONAL EXPECTATIONS

One of the more memorable moments of last week's panel discussion to launch former revenue secretary NK Singh's book, The Politics of Change, was Finance Minister P Chidambaram wading into NDTV chief Prannoy Roy over his remark that the government needed to do something big""instead of making achar (pickle) with its $220 billion forex reserves (this got a big laugh from the audience), Roy suggested some part of it, say $50 billion, be used to fix India's water problems. To buttress his point, Roy cited what the Chinese had done with their reserves. Admittedly, the point wasn't too well thought out for, as Chidambaram pointed out, it wasn't possible to spend $50 billion outside the country to solve India's internal water woes""what do you import of that value by using forex reserves? Yet, no one thought it advisable (given the lack of economists on the panel, perhaps none even realised this) to tell the FM he was being wonky, to use his term, when he said the National Rural Employment Guarantee Act (NREGA) was a cash-transfer scheme.

Even if you forget the scheme's lack of success (just a third of households wanting jobs have been provided these; see BS' edit, "Hardly job guarantee," 9/2/07) or the leakages in its implementation, the point is that while a cash transfer scheme costs under 1 per cent (Invest India and Sewa are working on pilot projects for pension co-contributions, which envisages a cost of 50 basis points), the NREGA assumes 30-40 per cent will be the capital cost. That is, if Rs 100 was to be transferred to the poor using an Invest India-Sewa mechanism, a poor household would get over Rs 99""if the same was to be given via the NREGA, the poor household would get only Rs 60-70 (the rest would be used to buy bricks and cement), and that too after doing backbreaking work. Enough evidence exists to show that if the government was to work on direct cash transfers instead of the old and new NREGA-type of social security schemes, it could eliminate poverty at a fraction of what is spent today (see Arvind Virmani, Poverty can be eliminated, BS, 29/6/07). Indeed, there is no evidence that NREGA-type schemes eliminate poverty, either""while much is made of the scheme's success in Maharashtra, from where the design was lifted, poverty levels in that state did not decline faster than the national average in the 1983-84 to 1999-2000 period, when the scheme was in use.

Okay, you can hear government officials say, this logic may be true for anti-poverty schemes, but surely it cannot hold for other government spending, like that on education or on health, for instance. These sectors, among others, are likely to see a big jump in plan spending when the full Planning Commission meets to finalise the 11th Plan outlay, possibly later this week.

While the results of the Pratham all-India rural survey are well-known, it may be a good idea to revisit some of the headline numbers. While just 18.1 per cent of children in class III in government schools could read a full story, the figure was 28.4 per cent in private schools; in terms of the ability to divide, it was 14 per cent and 21.3 per cent, respectively. James Tooley's field studies showed even higher levels of difference.

Another study, out just some weeks ago, by Sonia Bhalotra of the University of Bristol, on health spending, has even more stark findings (http://www.iza.org/index_html?lang=en&mainframe=http%3A//www.iza.org/en/webcontent/personnel/photos/index_html%3Fkey%3D2905&topSelect=personnel&subSelect=fellows). Bhalotra tries to find out whether or not government spending on health has much of an impact on infant mortality, and if so, how much. The same could be done for other aspects of health, but mortality impact is obviously easier to measure""it's difficult to know whether public health has improved or not in an area, but the number of deaths is something that's a lot less nebulous.

While earlier studies such as those by Filmer and Pritchett have found that government spending on health saves no lives (they found 95 per cent of the variation in mortality was explained by income levels, education and so on), Bhalotra has used the National Family Health Survey of India to examine the relationship at the level of the states. Using data for just one year, instead of over a period of time, also allowed her to eliminate the impact of advances in medical technology that help reduce mortality over the years. After doing all this, the results are more or less the same that Filmer and Pritchett get""that government health intervention hardly has much of an impact, once you control for gender, mother and father's education and so on. To quote from the paper, "In the de-trended data, it is unclear that increases in health expenditure are associated with decreases in mortality." When lags are allowed for (look at the impact a few years after the expenditure), and only rural areas are looked at, then you see an impact. But health expenditure is less effective for more vulnerable sections of society, and doesn't really help in the case of children whose mothers are not educated (that is, education more than health expenditure improves health outcomes!).

All of which would suggest the government needs to get out of the business it is in, and work on ideas like cash transfers which involve the private sector; in any case, better quality water and sanitation will probably do more good to public health than health spending will. Anything other than this will be, to use the FM's term, wonky. Perhaps, instead of the babus in various ministries and the Planning Commission, the task is better left to the likes of ICICI chief KV Kamath, one of the few members of the NK Singh panel who had sensible suggestions to make""connecting the country's fragmented markets, he said, would probably have a bigger impact on poverty removal that anything else.