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The show must go on: India’s economic agenda remains unchanged

The Indian electorate has defied predictions of certainty, but the economic agenda for India remains unchanged. Despite impressive economic progress since 1991, India remains a low-middle-income economy. Policy priorities include urban expansion, modernization of agriculture, tackling unemployment, and addressing state-level disparities. Additionally, India must prepare for challenges such as aging populations and technological advancements to sustain growth.

The Indian voter has disproved punters and experts of their idea of ‘certainty’. Which doesn’t change the economic agenda before India and the incoming government. The economy has made impressive strides since 1991. Growth has become more resilient, too. Yet, India remains a low-middle-income economy with a per-capita income of about $2,600. Here are some policy priorities for the country during the years ahead, regardless of what shape the new government takes:

Urbanisation Push

Prosperity will follow continuous migration of rural populations to the cities. For this, existing cities need to be expanded and managed better, and new cities need to be developed. Internal migration needs to be internalised as an important economic force. Host states ought to see the benefits of migration and deflect political resistance, initially gently and perhaps at some point through a call for ‘one nation, one people.

Redefining Agriculture

Even as the share of agriculture in GDP has declined, it accounts for a much larger share of employment, indicating low incomes earned per person and low productivity. Due to population growth rate slowing to less than 1% a year, rise in per-capita income and urbanisation, demand for agricultural products has shifted from cereals toward fruit and vegetables, proteins, health and organic foods, and convenient processed and semiprocessed food. Yet, India’s agriculture has not evolved to keep pace with these shifting trends in demand. Increasing the farm size, making it more productive and commercially viable, and mapping its output to domestic shifts in demand and global markets would increase income levels and make agriculture less fiscally dependent.

Work on Job Front

Despite a very low unemployment rate overall, a large fraction of the population is employed in the informal sector, barely earning subsistence wages. India’s population is projected to grow until 2045, making employment a challenge for years to come. It will necessitate generation of more employment-intensive and skill-intensive activities, as also greater outward and internal migration. India needs to project domestic and global demand in the years ahead and build capacity in activities with projected increase in demand, such as health, hospitality, personal care, elderly care, education, data, software, retail, research and aviation.

State of States

Indian states exhibit a great deal of heterogeneity in their levels of income, growth rates, quality of human capital, ‘ease of doing business’, demography, comparative advantages, and in their understanding or commitment to economic growth. Their transition toward high-middle-income economies and beyond would require different states to tailor their own policy pathways and manage them politically, similar to how Chinese provinces implemented some of the harder reforms early on. Some of the states have a very high ratio of public debt to respective GDP levels, leaving little fiscal room to spend on developmental priorities. A commission could be set up by the new government to look into state finances. It could consider debt relief to states in distress, with in-built incentives for raising revenues and wise spending.

Avoid the Trap

It’s easier to grow at India’s current levels of income, than when per-capita income levels increase to about $5k-10k. Most economies slow down when they attain middle-income status. To avoid such a fate, India will need to continue to find new drivers of growth. It will also need to simultaneously prepare for emerging global challenges such as an ageing population, climate-related events, technology and skills replacing labour in erstwhile labour-intensive activities, a heavily indebted world in need of deleveraging, and an increasingly geoeconomically-fragmented global order. Regardless of what the new GoI shapes up to be, carrying along different shades of political opinion, its economic flight path remains the same.

The writer is director general of National Council of Applied Economic Research. Views are personal.

Invisible puppeteer: a call for debt management reform

Elevating to autonomous, system-wide financial stewardship is not just advisable but essential.

In 2024, the world faces an unprecedented financial challenge. Global debt has soared to a staggering $310tn, catapulting the global debt-to-gross domestic product ratio to an alarming 340%. This colossal debt burden has proven to be a formidable obstacle, with debt risks looming large. The current situation is critical and incomplete.

If debt is an economy’s lifeblood, then liabilities are its pulse. A complete picture of a country’s debt plus other liabilities will become accurate only after including hidden liabilities such as undisclosed debts, opaque financial obligations, unhedged exposures and economic leverage. Some other financial commitments include pension obligations, deferred tax liabilities and non-contractual obligations to suppliers and foreign investors. The actual financial burden that every country faces is much higher than what the global debt number tells us.

The tail wagging the dog

Historically, sovereigns relied on public debt management to secure funding, control risk and minimise costs for debt-related public liabilities. While public debt remains only part of a country’s liabilities, it now intersects all core economic policies and markets. Debt management is no longer a narrow, government-controlled technical function secondary to fiscal and monetary policies. The vast scale and diverse use of total debt has created a scenario where debt management increasingly shapes broader economic and financial policies, governance and capital market dynamics. The tail (debt management) now wags the dog (macro-financial stability).

To effectively manage debt and all liabilities, a top-down, country-wide reform is necessary to move towards a comprehensive liability management function. With the increasing blurring of lines between public and private debt and financial obligations, the need for an integrated approach to debt and liability monitoring, surveillance, transparency, disclosure, contingency planning and risk management is greater.

Both public and private borrowers face the dilemma of balancing short-term gains against long-term costs and risks. However, individual choices often lead to system-wide distortions. Unhedged or riskier funding structures in both sectors significantly heighten a country’s macroeconomic and external vulnerability – a risk we cannot ignore.

The current arrangement ignores the vital financial resilience link between debt and liability management and the public and private sector financial asset positions. Borrowing collateralised by public assets and foreign exchange reserves disrupts decisions regarding the management of a country’s financial and nonfinancial assets. Liabilities from public-private partnership projects are notorious for misreporting debt service obligations and leverage, owing to poor coordination, procedures and institutional capacity, affecting both sectors’ financial positions.

A whistleblower role

A forward-looking and augmented debt management function must go beyond borrowing and funding the government. It must become a strategic part of a country’s economic and financial institutional architecture that helps a country keep macro-financial interactions stable and assured.

Hidden, undisclosed and opaque debt has exacerbated vulnerabilities in many countries. Frequent misreporting or a lack of reliable statistics afflict contingent liabilities with insufficient control over nonfinancial and subnational-level debt. A complete profile of public and private liabilities and leverage is necessary to detect problems early and act promptly.

A dedicated system-wide debt and liability monitoring and management function could combine different types of a country’s balance sheet vulnerabilities, including those arising from the private sector and households. While liability management could remain with the respective economic agent, integrated monitoring of such exposures and risks will facilitate borrowing and hedging strategies and send out early alerts to governments, businesses and households to avoid unmanageable debt.

The reformed function could act as a ‘whistleblower’ on a country’s explicit and latent sources of debt vulnerabilities and financial obligations, with powers to check and balance the system.

An autonomous approach

Some countries have granted autonomy to their public debt management agencies, but the degree of independence varies, and accountability needs to be clarified. An autonomous function will insulate a country’s debt and other liabilities from political pressures, determine how best to meet its direct and indirect financial obligations and create space to fund sustainable development, infrastructure and other social priorities. Such a mechanism could also be reassuring for long-term investors and agencies that monitor a country’s solvency.

The Covid-19 pandemic underscored the importance of robust debt management strategies for both the public and private sectors to manage systemic crises and assure funding under stressed conditions.

Central bank balance sheets’ use (or misuse) for political or economic reasons further strengthens the case for an autonomous and accountable debt and liability management function. Such a function would lend support to central bank independence. Often, central banks are compelled to hold substantial amounts of debt, find unorthodox ways to fund a government or even use foreign exchange reserves and exchange interventions to support the private sector in servicing its external liabilities.

An autonomous, system-wide debt and liability function could also rein in who has the authority to incur debt and other liabilities. It could keep a national register to track, control and advocate for mandatory parliamentary reporting of system-wide debt and liabilities and how they tally with the asset side of the country’s balance sheet.

The liability of a sovereign could well be an asset of a private entity. The augmented function could introduce legislatively backed controls on the amount and type of liabilities outstanding, potentially preventing more borrowings than required. The integrity of such a function will require a strong governance and accountability framework.

Perspective from developing countries

There is a strong case for re-evaluating debt management within the economic policy framework of countries in debt distress or developing countries with market access. Multiple instances have shown unknown amounts in the debt and liability profile. Hidden debt is a problem, and more disclosure requirements and understanding of liabilities are needed. Much will depend on the macroeconomic environment, institutional and governance framework, the legal framework’s robustness and debt-related integrity practices.

Thanks to the stellar work of the International Monetary Fund and the World Bank, some developing countries have made strides in establishing more autonomous public debt management functions as part of broader public financial management and financial reforms. A few also adopt a more integrated view of public and private debt.

While institutional capacity is the cornerstone of effective debt management in these countries, the challenge of liability management extends beyond honing the technical skills of debt issuance to fortifying governance structures and assigning the proper role for the augmented function.

A reimagined liability management function could facilitate solutions to critical gaps plaguing debt in developing countries. These include debt transparency, the lagging implementation of good practices and guidelines, and following up on technical assistance advice.

As highlighted in a recent survey of 60 countries by IMF staff, several material shortcomings in the domestic laws facilitate recourse to opaque debt structures and complex instruments, muddying the waters of debt sustainability analyses. One of the many recommendations is enhancing the institutional arrangements for debt monitoring and management at a country level.

Seeking new ways

The traditional roles and responsibilities of debt management function are due for reassessment. As public debt and private liabilities continue to soar, the need for effective debt and liability management has never been greater. By broadening their focus, adopting an integrated approach and leveraging technology, national legislators can help ensure economic stability and growth. Countries could even undertake constitutional reform to set up a system-wide and autonomous debt management function under accountable governance.

Some may find no need for reform or change and dislike the concept. Let that be the privilege enjoyed by those who remain guided by the medieval days of debt management. For those seeking new ways to secure the future of the generations ahead, it is time to implement a reformed national debt and liability management function. Our intergenerational economic and social health depends on it.

Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.

India Human Development Survey: May 2024

The IHDS Forum is a monthly update of socio-economic developments in India by the IHDS research community, based on the India Human Development Survey, jointly conducted by NCAER and the University of Maryland. While two earlier rounds of the survey were completed in 2004-05 and 2011-12, respectively, the third round has also been launched and surveys have already been conducted in a number of States.

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Monthly Economic Review: May 2024

In the Review, we summarise the economic and policy developments in India; monitor global developments of relevance to India; and showcase the pulse of the economy through an analysis of high-frequency indicators and the heat map.

 

MER May 2024 Report

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Out-of-pocket medical expenses, a big problem

This is more so in rural areas. Insurance cover, public health are issues.

The Covid-19 pandemic has redefined our health policies and strategies. It laid bare the inter-linkages between the healthcare systems, its availability, adequacy and affordability.

At the core is the cost implication and impact on households over hospitalisations and healthcare interventions. The cost impact is most acute for those who bear it entirely out-of-pocket.

The worrisome and perhaps unsustainable aspect of healthcare financing is the rising out-of-pocket (OOP) expenditure for households. Per the December, 2023 study by the National Insurance Academy (NIA), over 50 per cent (in 2020) of healthcare expenses are borne directly by individuals. It signifies a substantial reliance on out-of-pocket payments.

So to finance their healthcare expenditure, people either have to dip into their savings or borrow. Not being able to easily finance their health expense would result in some section of the ailing population foregoing treatment, or resorting to desperate financing.

RURAL-URBAN DIVIDE

A close examination of the data from the National Sample Survey (NSS) rounds of household consumption expenditure survey spanning from 1999-2000 to 2022-2023 unveils an intriguing narrative.

Hospitalisation expenditure is showing a rising trend in rural households. Monthly per capita consumption expenditure (MPCE) on hospitalisation has risen from 1.37 per cent of the total in 1999-2000 to 2.36 per cent in 2022-23. In urban areas, the increase over this period is from 1.44 per cent to 1.91 per cent (see table). Lack of medical facilities and specialised manpower have forced people in rural areas to rush to urban and semi-urban centres and cities for medical treatment.

Apart from the treatment and hospitalisation expenses, expenditure also has to be incurred on transportation, food and lodging. With better medical facilities, urban households’ share out of their MPCE in hospitalisation expenses is comparatively lower, except during 1999-2000, and it ranges between 1.44 per cent and 1.96 per cent.

It is also interesting that non-hospitalization expenses (i.e., OPD expenses on medicine, X-ray, ECG, pathological tests, doctor’s fees, and other medical expenses) consumed a much larger share of households’ MPCE in both rural and urban areas, with rural households being more disadvantaged.

Perhaps the frequency at which expenses are carried out for non-hospitalisation interventions is a factor. It hovered around 4.72 per cent in 1999-2000 to 4.77 per cent in 2022-23 with a slight dip in 2009-10 for rural households. It stood at 3.62 per cent in 1999-2000 and at 4.00 per cent in 2022-23, with a slight dip in 2009-10 in urban areas.

Cumulatively, it implies that rural households spent about 5 per cent to more than 7 per cent of their total monthly expenditure on hospitalization and non-hospitalisation expenses. It is lower for urban households at 5 per cent to less than 6 per cent of their monthly expenditure.

Rural households are often forced to go to urban centres to access quality healthcare. Costs incurred on transport, food and lodging are additional expenses for them

This variation could be explained by the fact that generally rural households have a lower per capita income and they have to incur travel expenses when they go to urban centres for treatment where medical facilities are better. The rising medical cost would further dent rural households’ budget.

Moreover, health insurance coverage in the rural areas is much less compared to urban areas. The NIA Report revealed that across age groups the “health protection gap” is in the range of 65-90 per cent in rural areas.

A VIABLE STRATEGY
Lowering the burden of medical expenses, especially out-of-pocket expenses, on households warrants a holistic approach for both the rural and urban households.

Public health spending in India has been abysmally low at below 3 per cent of the GDP. In the developed countries, it is between 6-10 per cent of the GDP.

There is a need to gradually raise it. Strengthening and supplementing the existing medical facilities and manpower in the rural areas will go a long way in reducing medical expenses.

Health insurance penetration in the country is not only inadequate but premiums have been on the rise. The government induced health insurance products through various schemes is limited in it reach.

According to the NITI Aayog Report of 2021, about 40.5 crore are the “missing middle” individuals who are not covered under any health insurance schemes. Insurance companies have so far been shying away to expand their coverage in rural areas.

IRDAI on May 10, 2024, issued a master circular directing insurance companies to do a certain percentage of business compulsorily towards meeting rural, social sector and motor third party obligations. Under this the general and health insurers would be allocated gram panchayat.

Every individual possesses a fundamental right to healthcare. Customised health insurance products along with improved public healthcare facilities will definitely contribute in lowering the burden of the households.

All stakeholders need to play a pro-active role. Any initiative aiming to reduce out-of-pocket expenditure is a step forward to prevent households from catastrophic healthcare expenditure.

Baruah is Associate Fellow at National Council of Applied Economic Research (NCAER); Wankhar is a retired govt officer. Views expressed are personal.

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