Weekend reading links

1. PE firms sitting on $4 trillion of unsold assets, on investments largely made between 2020 and 2022 when rates were slashed to zero, are finding creative ways to offload them. Sample this

Blackstone is marketing a so-called collateralised fund obligation that will bundle more than $2bn of stakes in leveraged buyout funds into bonds to sell to investors and insurers, according to people familiar with the matter. The deal would provide an infusion of cash to investors in a Blackstone Strategic Partners fund, the firm’s unit that invests in other private equity groups’ funds. It is unclear if Blackstone will ultimately go ahead with the securitisation or seek to sell the stakes in a secondary transaction, one person briefed on the matter said... The vehicles, which are sliced and diced to give investors exposure to different levels of risk and return, have boomed. Issuance of CFOs soared to a record of $25.9bn last year from a modest $4.8bn in 2021, according to credit rating agency KBRA.

2. This is a brilliant articulation of the problem with articulating something purely in terms of absolute numbers and aggregates.

In his novel Hard Times, Charles Dickens described a girl called Sissy, who was having a terrible time in her lessons. Her schoolmaster told her to imagine that her schoolroom was a nation in possession of “fifty millions of money”. Wouldn’t that mean it was a prosperous and thriving state? “I said I didn’t know,” she relayed afterwards to a friend. “I thought I couldn’t know whether it was a prosperous nation or not, and whether I was in a thriving state or not, unless I knew who had got the money, and whether any of it was mine. But that had nothing to do with it. It was not in the figures at all.”

3. Interesting story about how old companies are reinventing themselves to profit from the AI-boom.

AI servers must be more tightly linked together, increasing the need for advanced cabling and optics. Shares in Corning, the 175-year-old inventor of Pyrex glass that also supplies screens for Apple’s iPhones, have increased by more than 270 per cent in the past year after it signed deals with Meta and Nvidia to supply optical fibre cabling to AI data centres. The vast amounts of electricity needed for AI training are also fuelling demand for specialised power management, high-voltage electronics and cooling technologies. This has led to big interest in traditional suppliers of electrical equipment, typically deployed in residential and industrial projects. Eaton, an Ohio-based power management company, received 240 per cent more data centre orders in Q1 this year...

 

French electrical equipment maker Legrand has doubled its revenues this decade with half of the growth coming from data centres, which now make up more than a quarter of its turnover. Air conditioning and liquid cooling — using water to stop chips from overheating — are in demand too. Shares in AC maker Comfort Systems USA have shot up 260 per cent over the past year, while Schneider Electric bought a stake in data centre liquid cooling specialist Motivair for $850mn last year. Utilities are rushing to supply AI companies with power — including Spain’s Iberdrola, a leading supplier of power contracts to tech groups in Europe, according to Pexapark data, and Entergy in the US, whose share price hit a record high after a $10bn deal with Meta... Several generator and engine companies have also pivoted to supplying data centres, including Caterpillar, Boeing supplier Howmet Aerospace, Finnish ship engine maker Wärtsilä and Baker Hughes, which formerly focused on oilfield services.

4. China demographics facts of the week.

This year’s cohort of gaokao-takers were mostly born in 2008, a year of 16.1m births. By 2025 births had more than halved, to just 7.9m. The demographic cliff is already visible in nurseries, which saw pupil numbers plummet from 46m to 32m between 2022 and 2025. Numbers in primary schools have also started to thin. Inevitably, over time, secondary schools and then colleges will follow.

And technology adoption

A survey of 322,000 students last year by the China National Academy of Educational Sciences, a state-affiliated think-tank, found that 85.6% of them had already tried using AI to complete their homework. On popular apps such as Zuoyebang (“Homework Help”) and Yuanfudao (“Ape Tutoring”), pupils snap photos of questions and ai walks them through the solutions. (Teachers are using similar technologies to help mark homework.)

5. Public moods on the role of government in the UK - 70% support nationalising energy and 82% water.

Rail subsidies have been rising, £12bn in operational support in 2024-25, up in real terms from £2bn in 2000-01. 

6. Indian economy facts of the week.

The World Trade Organization data show that for non-agricultural goods, the share of tariff lines in the category 10-15 per cent increased sharply from 1.4 per cent to 33.5 per cent between 2014 and 2024 and for the tariff category 15-25 per cent from 1.7 per cent to 14.9 per cent, while the share of tariff lines in the category 0-10 per cent fell steeply from 90.5 per cent to 42.5 per cent over the same period.

7. From Thomas Astbridge's book on the Black Death 

In its most intense phase, from 1347 to 1353, the Black Death killed more than 100mn people, or about half the population in the areas infected, Asbridge estimates. This makes it more lethal than two other great pandemics — the 6th-century Plague of Justinian in the Mediterranean and the pestilence that swept across Asia from the mid-19th century until the aftermath of the second world war — and far worse than Covid-19 in our times... Asbridge demonstrates that the Black Death was probably more devastating in cities such as Cairo and Damascus than in, say, Constantinople or Florence. In Cairo, a metropolis of 500,000 people, almost 10 times larger than London’s population, perhaps 250,000 died, Asbridge suggests.

8. On the role of luck in football tournaments.

According to one study of historical matches, the chances of the team with the worse record winning was 45 per cent in football, compared with just 36 per cent in America’s National Football League. (Yes, this pep talk has statistics. Bite me.) The knockout structure raises the role of chance, as just one dodgy penalty can crash a team out of the competition. According to numbers crunched by James Tozer of Prospect, a sports analytics company, betting odds gave the top four teams in the most recent Premier League a combined 89 per cent chance of winning (after adjusting for bookies’ ability to take advantage of fans’ optimism that their team would win). In the World Cup an upset is more likely, as that figure is only 48 per cent.

9. Aldi effect, as the discount grocery retailer seeks to expand aggressively, as it envisages 4000 stores at an investment of $9 billion in a US market where consumers are facing higher prices due to persistent inflation.

Credit card data analysed by the bank found that when an Aldi store opened, it shaved an average of one percentage point off annual sales from competitors within a 10-mile radius... Aldi prospered in postwar Germany under brothers Karl and Theo Albrecht before a disagreement led to a split in the 1960s. One offshoot, Aldi Süd, oversees Aldi’s US business after opening the first store in Iowa in 1976. The other, Aldi Nord, owns the quirky US grocer Trader Joe’s. The discounter’s stores are austere places with only about six staff on duty. They are designed for maximum efficiency: groceries are shelved without leaving their cardboard shipping trays and oversized bar codes are printed on packing so checkout operators can scan at pace. Customers must deposit a coin to obtain a shopping trolley, which is refunded if they return it. Operating cost savings fund the chain’s low prices... Aldi’s compact stores, which stock only about 2,000 product lines, are often located near competitors such as Walmart, whose large-format stores carry about 120,000 products, including low-priced groceries.

10. Andhra Pradesh shrimp production facts.

India exports approximately 8 lakh tonnes of shrimp a year, with Andhra Pradesh accounting for over 60 percent of production. The state accounts for 80 percent of the country’s shrimp exports and 34 percent of marine exports, valued at around Rs 21,246 crore annually. The state has 2.5 lakh aqua farmer families, of which 2 lakh are small and medium farmers. Another 30 lakh people depend on allied sectors. According to the Union Ministry of Commerce and Industry, India exported a record 17,81,602 MT of seafood worth US$ 7.38 billion (Rs 60,523.89 crore) in 2023-24, of which frozen shrimp alone accounted for 92 percent — a significant share from Andhra Pradesh.

11. India's PPP pioneers

GVK’s 216-megawatt (Mw) Jegurupadu plant became an early proof-of-concept under a power purchase agreement. IL&FS built a 12-km toll road between Rau and Pithampur in Madhya Pradesh, marking India’s first private toll concession.

12. This is a true success story for the Indian economy.

Between 2020 and 2026 the number of Indian retail investors rose from around 40m to 130m.

Weekend reading links

1. German bread facts of the week.

Germany has what may be the most diverse bread culture in the world. The official bread registry overseen by Germany’s national bread institute (yes, really) lists more than 3,000 types. Specialities include pumpernickel, Dreikornbrot (three-grain bread) and Kürbiskernbrot (pumpkin-seed bread). There are specific regional iterations of rolls: Brötchen in the north, Semmeln in the south. In German the word “bread” is partially interchangeable with “meal”—a working lunch is Pausenbrot (break-time bread), dinner is Abendbrot (evening bread). Bavarians, who always do things differently, add Brotzeit (bread time).

2. The number of Indians studying abroad has tripled in five years to 1.8 million in 2025.

3. Visakhapatnam's data centre ambitions are staggering in scale.

Andhra Pradesh has promised Google, Meta, Reliance, Tata Consultancy Services, and half a dozen others a combined 5 GW of data-centre capacity in Vizag alone. That is more than three times everything India has built in 30 years, in a city that had near-zero data-centre infrastructure six months ago... (the government) has committed to 6 GW across Andhra Pradesh in five years, a cable network twice the size of Mumbai’s, and three undersea cable-landing stations—essentially building a digital future on the eastern coast... The state’s own electricity planning documents project Vizag’s peak district demand at 2.2 GW by 2029. Google alone has applied for 2.1 GW from the local distribution company... 

Google is building a 1 GW campus across three sites: Tarluvada, Adavivaram, and the Rambilli-Atchutapuram cluster. Meta and information-and-communications-technology company Sify are reportedly building a 500 MW facility at Paradesipalem, a village 25km from the city. Reliance and alternative asset manager Brookfield’s joint venture has signed a $11 billion MoU for another GW. TCS, Adaniconnex and real-estate developer Anant Raj round out the cluster. Even if the announced 5 GW materialises, Vizag would rank among the largest data-centre clusters in the world. Northern Virginia, the global leader, sits at 6.6 GW. Beijing, London, Tokyo, Singapore—all around 2 GW each. Mumbai, India’s current data-centre capital, has around 600 MW of operational capacity.

The emerging constraint to these ambitions is power supply.

Deloitte has warned that data centres in Andhra Pradesh alone could add 2–3 GW of peak electricity demand by 2030—up to 20% of the state’s entire current peak load—risking grid instability if transmission infrastructure doesn’t keep up... The Andhra government’s Data Centre Policy 4.0 (the “4.0” a chosen suffix for most of the current TDP government’s industrial policies) offers electricity duty waivers for five years and a Re 1 per unit discount on industrial electricity tariffs for 15 years... state has committed over Rs 22,000 crore in incentives to Google alone... Vizag’s data-centre sites are on the eastern coast, far from the state’s renewable-energy generation zones in the south and west. “You would need entirely new, dedicated high-voltage transmission infrastructure. Not an upgrade to existing lines, but new corridors built from scratch,” said a former APIIC official. “In India, this typically takes years to tender and build. And I don’t see them speeding up the process for these mega projects.”

And the solution is to outsource electricity generation or sourcing to the data centre developers themselves. 

In a first for the state, it has granted a private entity, Google, a distribution company licence, allowing it to bypass the standard grid entirely and procure power directly from generators. Reliance is going further still, building its own 6 GW solar project to supply its data-centre operations... when Google contracts directly with generators at premium rates, those generators have less power to sell to the state discom at regulated prices. The discom, which still has the same demand to meet, has to make up the shortfall by either paying more on the open market (which it then recovers through higher tariffs) or simply cutting supply to consumers who have no alternative. If enough large consumers exit the grid, the discom’s revenue base shrinks while its fixed costs stay the same. Eventually, the grid gets more expensive for everyone who remains on it... The data centres planned in Vizag will operate on a hybrid model—hyperscalers will anchor the demand, local operators will build and run the physical infrastructure. Google is the end user. Adaniconnex builds the campus and co-invests in the power infrastructure. Airtel builds the cable-landing station and fibre backhaul.

4. The rise and rise of Chinese cars.

The market share of foreign firms in China has almost halved in five years, to around 30% in 2025. Moreover, in 2023 China passed Japan to become the world’s largest exporter of cars. In 2025 over 8m of its vehicles went abroad, nearly a third more than the year before. In Europe over the past five years, Chinese brands have gone from almost nowhere to nearly 9% of all sales, estimates Schmidt Automotive Research, a consultancy. Incumbents are also under siege in markets from Mexico and Brazil to Indonesia and Malaysia.

5. China promulgates its version of US CFIUS.

In recent weeks the State Council, or China’s cabinet, has issued two menacing decrees. One threatens trade curbs in response to actions that undermine Chinese supply chains (potentially including shifting orders to foreign factories). The other vows countermeasures against firms that apply foreign sanctions against Chinese companies, which in effect criminalises compliance with American law.

6. If the US sanctions individuals, they will be denied access to the services offered by among others, Amazon, Alphabet, Meta, Microsoft, Visa, Mastercard, Paypal, Apple, Slack, WhatsApp, Zoom, YouTube, Uber, Instagram, UPS, Fedex, Booking.com, and Expedia. FT writes about the scenario of US extending sanctions to services. 

Weaponising services would mark a clear escalation from trade disputes over goods and have huge repercussions for both sides. For decades, Europe’s economic relationship with the US has been defined by deep integration: goods flowing westward across the Atlantic, services coming back the other way. The EU’s surplus for goods in 2023 was €156.6bn; the EU’s deficit for services that same year was €108.6bn. As geopolitical tensions rise, that interdependence is seen by many EU capitals as a weakness that needs to be fortified as fast as possible.

7. A New York Fed study finds that around 90% of the Trump tariffs have been borne by US consumers and companies. 

Further, the complexity of the tariff regimes and its multitude of carve-outs means that the effective rate is lower than the headline tariff.

8. Global economic imbalances are back. Two graphics capture them starkly. The first is how China and the US represent the two sides of the problem. 

Global public sector indebtedness is at historic highs. 

This is a good description of the way out, though it is unlikely to happen on its own. 

As a first-best response, the Centre for Economic Policy Research’s fourth Paris Report recommends fiscal consolidation in the US, boosting household consumption in China and an increase in productive investment — modelled on former Italian premier Mario Draghi’s report — in Europe. These measures would encourage more balanced patterns of global saving and investment.

9. A ten-fold increase in export restrictions since the pandemic.

According to Global Trade Alert, the number of distortive export restrictions and bans has increased dramatically since the pandemic. Before Covid, an average of 22 export restrictions were being introduced a year. Since 2020, that average has shot up to 228.

Weekend reading links

1. M Govinda Rao makes the case for an Independent Fiscal Council for India, which was advocated by both the 13th and 14th Finance Commissions.

2. The Economist has an article on Hollywood and China. Cinema too has been characterised by the spectacular growth that is a feature of China's emergence,

In 2005 China had 4,000 theatre screens, slightly more than Britain at the time. Last year it had nearly 70,000, according to Omdia, a market-research company, almost equal to America and Europe combined.

Like with foreigners in all other sectors, foreign film companies too face the same type of excessive restrictions in China, even as Chinese companies enjoy far more liberal environments elsewhere,

It is strictly enforcing rules that require co-productions to have at least one-third of their investment from Chinese partners, at least one scene shot in China and a cast that is at least one-third Chinese... usually only domestic films are awarded slots during the four main holidays—spring, summer, national day and Chinese new year—when around half the year’s tickets are sold.

Even release dates and advertisement budgets of foreign productions are regulated. Then there are the  overt and covert censorships, which often involves significant changes to storylines. But all these restrictions have not dimmed Hollywood's commercial interest in the massive Chinese market. Like other parts of corporate America, the short-sighted commercial allure overcomes these restrictions and risks of being armtwisted on intellectual property and/or outmuscled by local competitors who copy from Hollywood. Broader national interest though has never been a major consideration to American businesses.

While Hollywood's themes are dominant in China, there are serious limits to Chinese soft power projection. Sample this about its biggest production so far,

Chinese productions, by contrast, seldom make much money outside China. “Wolf Warrior 2” (2017), China’s highest-grossing film, produced by cfgc and others, took less than 2% of its $870m haul overseas. (Its tagline—“Anyone who offends China, no matter how remote, must be exterminated”—will not have helped.)

3. Good report on the recent catastrophic landslide in Idukki district of Kerala and how the state may be the experimental laboratory for climate change in India,

According to an estimate, the rain gauges of the Kannan Devan Hills Plantation (KDHP) recorded a high of almost 62 cms rainfall on August 6, the night the landslide took place. If the statistic is true, it validates the changing pattern and nature of monsoon rainfall Kerala has been getting over the past three years: extreme amounts of rain in a short period of time in a particular area.

4. Apart from motor bikes, another rare Indian manufacturing success is tractors. India is the world leader in tractor production and the leading exporter. Ashok Gulati has a good article about how tractor production took off after de-licensing in 1991 and bank credit became available.

5. Another neighbourhood problem facing Indian foreign policy - the impending $ 1 billion Chinese loan to Bangladesh for Teesta river management, thereby getting China involved in the hydro-politics of India-Bangladesh relations. 

6. Anshu Prakash has an oped which outlines how India lags behind in global R&D spending.

7. The NHAI announces much needed changes to its highways contracting terms to mitigate risks of construction risks. Among the changes, NHAI will have to hand over at least 90% of the site before work starts, remaining 10% within 180 days of work starting, and fines for any delays; review the average traffic once every five years instead of the current 10 years; and extending tenure in case of average traffic declines.

8. Good compilation of 140 school education interventions in Africa since 2014. Expectedly nothing jumps out in terms of actionability.

It is one more example of the limits to the idea of evidence-based policy making. Real world development is hard and requires prudent application of what is already known and, more important, the single-minded implementation of anything decided.

9. Interesting graphic about how unaffordable housing and forced longer commutes have been increasing across England.

10. Boris Johnson's appointment of 41 year old Simon Case as the new Cabinet Secretary, or head of UK civil service, appears to be one more in the series of decisions on personnel management and administration that have upended conventional wisdom. It is hard to imagine anything good coming out of this.

11. On the National Digital Health Mission

12. A summary of China's "dual circulation" strategy (DCS) of economic development, outlined at the May Politburo meeting.

The strategy, which envisions a new balance away from global integration (the first circulation) and toward increased domestic reliance (the second circulation), stems from Beijing’s belief that China has entered a new paradigm that combines rising global uncertainty and an increasingly hostile external environment with new opportunities afforded by a floundering and listless United States, which China has long viewed as its most important geopolitical rival... Chinese leader Xi Jinping declared in April that China must “take the initiative to seek change, and successfully capture and create opportunities in the midst of the crises and difficulties before us." This new worldview sees the continued decoupling of global supply chains as an enduring trend, and so Beijing now seeks to attempt a new “big thing”—balancing emphases on both internationalization and self-sufficiency (自力更生) that marks China’s own version of “hedged integration.” This model entails engaging international capital, financial, and technological markets when advantages can be gained while simultaneously bolstering indigenous capabilities to avoid overreliance on the global economy—due to national security concerns or the vagaries of global economic cycles.

It appears to be a two-track strategy. One, focus on servicing and tapping the potential of the domestic market. Two, prioritise external engagement to support the pursuit of Chinese leadership of advanced technology sectors. 

See also this and this.

At least the first part looks like the Chinese version of India's Aatmanirbhar Abhiyan and President Trump's Make America Great Again.

13. I have blogged on multiple occasions pointing the problems of focusing on PCR testing for Covid 19. Here is the latest article which highlights more challenges and argues in favour of faster and simpler antibody tests

14. Rahul Mazumdar compares India and Vietnam on international trade,

Vietnam’s total merchandise exports grew at an annualised average rate of 18 per cent in the last 10 years till 2019, as compared with India’s 5 per cent. During the same period, Vietnam attained a trade surplus of $47 billion, which again was a significant improvement over the trade deficit of $13 billion in 2010. While Vietnam started delivering trade surplus, India’s trade deficit increased to $156 billion in 2019 from $130 billion in 2010. Vietnam’s top exports, in 2019, comprised electrical machinery and equipment (with 41 per cent share), apparel (11 per cent), footwear (8), and machinery and mechanical appliances (5). The highest increase in exports during 2010-19 was in electrical machinery and equipment, the share of which in Vietnam’s total exports rose from 10 per cent in 2010 to 42 per cent in 2019 — within which the highest exports were recorded for mobile telephone (with a 13 per cent share), followed by electronic integrated circuits (7 per cent) and parts of mobile phones (6)... India’s top exports comprised largely low-tech manufacturing products like mineral fuels (14 per cent share), pearls (11 per cent), machinery (6), organic chemicals (5) and vehicles (5)... Hi-tech exports as a percentage of manufacturing in Vietnam stands at 40 per cent, whereas in the case of India it stands abysmally low, at 9 per cent in 2018... During 2009 and 2018, India’s exports to EU increased 1.6 times as against Vietnam’s 4.4 times.

The recently signed FTA with EU further increases the competitiveness of Vietnamese exporters.

15. Ananth points to this Andrew Batson blog that examines the legacy of Zhu Rongji. The part about the reforms to the state owned enterprises (SOEs) is interesting. The official policy was ‘grab the large, let go the small’ (zhua da fang xiao 抓大放小). Zhu Rongji undertook the latter and Li Peng led on the former. The two objectives were distinct, requiring people with different ideological bents of mind.

But without the latter, could the former have succeeded? And if Zhu had succeeded more with his liberalisation and competition, it would have perhaps started to conflict with the promotion of the biggest ones?

An intriguing aspect about the Chinese development trajectory is how they have managed to strike the balance on reforms across several sectors and areas of development. I don't think these have happened by conscious actions, but neither has it been due to plain good luck!

16. Vivek Kaul points out that a psychology of recession may have enveloped the Indian economy,

As per the CMIE’s Consumer Pyramids Household Survey, over 85 million people lost their jobs between March and June 2020. The third national multi-institutional survey on micro, small and medium enterprises (MSMEs) in India estimates that even at a conservative level, around 35 million jobs, close to a third of the jobs in the MSME sector, may have been lost as of the end of August. Other than people losing jobs, there have been salary cuts as well as reduced or zero increments. Job offers have been rescinded on. This has ensured that the psychology of a recession has set in. Even those individuals who have jobs have seen others get laid off and want to save more for a rainy day. Businesses have also lost their appetite to expand and invest... The impact of this psychology can already be seen in bank data. Both individuals and businesses are saving more. The time deposits (or fixed deposits) with banks between March 27 and August 14 jumped by a huge ₹6.7 trillion. In fact, last year, between March 29 and August 16, a similar period, they had increased by around ₹3 trillion, or around 45% of the current year. How do things look on the lending side? Between March 27 and August 14, the total outstanding loans of banks contracted by ₹1.5 trillion. This means that people are prepaying old loans and not taking on new loans on the whole... Retail loans between end March and end July have contracted by 0.9%. During the same period, the loans to industry and services contracted by 3% and 1.9%, respectively. Hence, despite what businesses say, their actions speak otherwise. So, the country as a whole is saving more and borrowing less, which means it’s spending less.

17. The story of Naspers is fascinating and is arguably the most spectacular success of the venture investing world,

Naspers, a South African media group founded in 1915. In a prescient bid to diversify away from newspapers in 2001 it paid $32m for a large stake in a piddly Chinese startup. Tencent, the startup in question, has since morphed into a gaming and messaging behemoth worth over $670bn. Dealing with the windfall presents unique management headaches. The unexpected upshot of a South African investment in China is a European consumer-internet giant. A year ago Naspers listed Prosus, a vehicle for its online bets, in Amsterdam. By dint of owning 31% of Tencent, worth about $208bn, as well as other investments made since, Prosus is the EU's fourth-most-valuable firm.

18. Finally, in a truly important reform, the Andhra Pradesh government has decided to meter agriculture connections, bill the consumption, and transfer the amounts to the farmers as a direct benefits transfer. The opposition across the state will be strong. The state is wisely trying to implement it in one district to start with.

Farm power metering is the small step for man but big step for mankind moment for farm power reforms.

Reimagining rural drinking water supply

Have you ever thought about the differences between how international development agencies, social enterprises, and governments in developed countries view the same development challenge. Let me illustrate with the example of providing drinking water to rural areas.

The world of international development agencies view rural water supply in terms of providing hand bores or submersible borewells with delivery standposts (and often storage tanks). Accordingly, the multilateral and bilateral agencies spend billions of dollars annually in providing rural drinking water supply. There are also local variants, ranging from chlorination of local stream water to even local primary treatment based facilities. 

The world of impact investing relies on social entrepreneurs who have devised innovative business and delivery models and technologies to deliver drinking water to people in villages on a sustainable basis. 

Finally, there is the world of public service delivery in developed countries. Like urban areas, rural water supply in developed countries is provided by treating river/lake water and delivering them to a catchment of population through a network of pipes, storage tanks, and booster stations. How many developed countries, at any stage of their economic development, has had water supply in rural areas through bore wells?

I agree that in deeply resource constrained environments, piped drinking water in villages is a pipe-dream. But it cannot be also denied that all the other approaches currently being tried out are weak holding operations at best and deeply unsustainable ones too (how much ground water can you draw after all). And in at least the middle-income countries, piped water rural water supply is no longer an unrealistic pitch as Telangana is showing. 

I can also understand the perspective of social enterprises. They are after all very marginal, almost negligible, players in addressing the global problem. Much the same applies to the non-profits too engaged with the problem. 

The hold of this narrative is such that academics, philanthropists, aid agency personnel and others engaged with development are so consumed with such ideas as to be not able to view such first-order development problems in their true perspective. So the provision of rural roads and electricity supply and so on are evaluated for impact and value for money on a partial equilibrium basis. 

Lant Pritchett has talked about "kinky development", the process of "defining development down",

Across the board, rich countries are backing away from the national development goals of poor countries, such as broad-based prosperity and effective government—i.e. productive economies, capable states, citizen controlled polities, and modern social interactions—towards a narrow agenda of low-bar goals, such as reducing “dollar a day” poverty; “completing primary schooling” (with no mention of quality of learning or education beyond primary); accessing basic water and sanitation; or focusing less on health and more on specific diseases. This is what I have called the “kinky development” agenda, as it doesn’t attempt to raise well-being across the board in developing countries, but just “kink” the distribution at arbitrarily low levels... 

Consider in this context the “Power Africa” initiative announced by the Obama Administration in June 2013 to improve access for the 600 million Africans who lack electricity. The press brief claimed: “Power Africa will build on Africa’s enormous power potential, including new discoveries of vast reserves of oil and gas, and the potential to develop clean geothermal, hydro, wind and solar energy.” Of course coal—which in 2013 supplied 39 percent of all American electricity—is not mentioned, because both the US and the World Bank had announced a ban on funding coal plants. But then America’s 2014 Appropriations Act declared that Senator Patrick Leahy, whose state of Vermont relies on hydropower and who endorses hydropower for his state, was able to insert a clause to block support for precisely what Power Africa supports, and to do so with more or less political impunity. Perhaps promoting energy source diversification is why President Obama, while touring a power plant in Africa, thought it politically expedient to promote the Soccket ball. For those of you who still have not been introduced to this technological marvel, the Soccket ball is a soccer ball containing a battery that is charged by the kinetic energy of being kicked. This contraption is perhaps one of the best illustrations of the gap between development realities (the average Ethiopian consumes 52 kwh of electricity and the average American 13,246 kwh) and the “solutions” being proposed by the world’s elite: ban coal and limit hydro and if Africans want power, let them kick some soccer balls round.

There is something about the need to reimagine development away from what is the propagated narrative that has been foisted by external do-gooders. For far too long, the development narrative in India has been entrapped in what is peddled by international development experts. And rural water supply is but only one example. 

At this stage of its economic development, India needs to shed the narratives that international development agencies have long peddled. No more handpumps and motor borewells, the time for treated piped water supply is well past. It needs more like the Telangana's Mission Bhagiratha and not some World Bank funded piecemeal rural water supply schemes.

The hiding hand that shifts the rural water supply paradigm

The Mission Bhagiratha program of the Government of Telangana that provides treated water through a piped network is truly an impressive achievement. If the numbers are to be believed, this has to stand up with the best in terms of project execution efficiency.

Sample this,

Launched in August 2016, Mission Bhagiratha, Telangana’s ambitious project to supply drinking water to every household outside municipal corporation limits, is nearing its March 31, 2019 deadline. And government officials say 1,00,200 km of the 1,04,749-km network of pipelines — around two-and-a-half times the Earth’s circumference — has been laid... As of today, drinking water reaches bulk collection points in 22,947 villages. The deadline to provide water at these collection points to the remaining 1,021 villages is January 10. The deadline to complete the project to provide drinking water through individual household taps is March 31, 2019... houses in 17,000 habitations were provided individual drinking water tap connections as on December 18, 2018. These households will start receiving purified drinking water shortly. About 95 per cent work of laying pipelines to the remaining 6,968 villages is completed and only last-mile pipes and taps have to be fixed... The 49,120-km primary pipeline network has already been laid through which water is being pumped. Around 51,080 km of a separate 55,629-km intra-village pipeline network has been completed.

Those conversant with the challenge of executing such projects in such tight timelines will vouch that this is a big deal, real world-class project execution, even with the discount for the quality and other parameters.

Hopefully it upends the conventional wisdom on rural drinking water supply and made Indian states re-imagine the delivery of drinking water to villages. 

Such projects naturally raise concerns across the spectrum of opinion makers. Will the water sources be always available? How will the infrastructure facilities be maintained? How will the leakages be plugged? Will water be billed? Who will pay for it? How will the bills be collected? How do we ensure quality of supply is acceptable? Given leakages and collection problems, will the delivery be efficient? And so on.

Needless to say, all of these are important questions. And for sure, in the coming years, there will be several examples of villages falling off the grid for various reasons and going back to bores, treatment facilities falling into disrepair, water leakages across the network, water pilferage and uncollected arrears, episodes of people in villages falling sick due to water contamination, mounting electricity arrears, discovery of poor quality works and materials, and so on. Several of them will, ex-post, be decried by opinion makers as being examples of populist misadventures and bureaucratic inefficiency. 

All fair points for arm-chair analysis, research publications and op-eds, and talking heads on television. 

But they miss the point about the re-imagination here. There is no developed country which supplies drinking water to the predominant share of its rural population through ground water bores. They all deliver surface water treated and piped to small habitations. No surprise here since this is perhaps the only way to sustainably and at scale deliver drinking water to population habitations, rural or urban. 

The journey to that destination can happen either in a planned and piecemeal manner or in the one-swoop manner of Telangana. Opinion makers and consultants would prefer the former. But if the Telangana government decided to plan everything and mitigate all these risks before venturing out with this project, it can safely be said that it would never have taken off. And Telangana would have lost the opportunity to break out of an entrenched retrograde development narrative and adopt perhaps the only sustainable approach to delivering drinking water to rural areas. Albert Hirschman's principle of hiding hand assumes relevance here. 

Undoubtedly, in the years ahead, all the aforementioned scenarios will materialise and the government will be criticised for this plunge. 

Looking ahead, perhaps the only fair prospective criticism of the government, in my opinion, would be, apart from egregious project execution failures and corruption, for not having put in place the required mechanism and response to emergent problems. And the latter failing is most likely. 

The challenges with Telangana's farm income transfer experiment

The Telangana state government's decision to implement direct income transfer to all its farmers is surely a landmark in India's agriculture policy space. Its outcome will be very closely scrutinised over the coming years. 

In brief, the State government have decided to transfer Rs 4000 per acre per season for the Rabi and Kharif crop seasons to all the 5.83 millions farmers as part of the Farmers Investment Support Scheme (FISS) or Rythu Bandhu Scheme. The transfers are to all agricultural land owners, irrespective of whether the land is brought under cultivation. This amounts to an annual subsidy outflow of Rs 12000 Cr or 7% of the total government expenditure, and would cover from 10-30% of the cost of cultivation depending on the type of crop. Two good assessments here and here.

Arguably the biggest challenge in achieving the scheme's objective of reaching small and marginal farmers arises from its not covering tenant farmers, a category not legally recognised in the State. Such farmers may cover atleast a third of all farmers.

So we have a pioneering agriculture policy reform being unveiled, perhaps the single largest direct income transfer program to farmers anywhere in the world. As Neelkanth Mishra has very nicely argued, it is almost impossible to make any reliable assessment of the program. And evaluations commissioned by the state government will take years to provide any actionable insight, if at all, whereupon the die would have been cast, either in terms of success or failure of the reform. Other states too would have jumped the bandwagon and emulated Telangana, inclusive of all the program's failings. So what is the best that can be done to ensure that the reform is effectively implemented?

At the very outset, we need to acknowledge that one could not have done an RCT to have evaluated the program before its implementation. Foremost, we do not have the luxury of time and KCR (the Chief Minister of the State) would surely not have had the patience. Public policy reforms rarely ever, if at all, happen in a calculated manner affording the luxury of detailed planning. They invariably happen as mutations. In any case, a small pilot evaluation would not have been able to reveal any of the several general equilibrium effects possible - how much of the money used for consumption, how much for investment, tenant-landowner dynamics and the income sharing, impact on land values, incentive distortion and leaving land fallow, impact on food prices etc. In the circumstances, the best effort would have been a rigorous qualitative assessment. 

Once the policy option is exercised, then the challenge is to ensure its high fidelity execution. This would mean ensuring land ownership details are accurately captured (can remote sensing data and GIS mapping, coupled with a field-survey, help with a one-time clean-up?), payments processed and delivered to the farmers in the most cost-effective and most accessible manner (can technology solutions and digital money help?), some way (short of a regulation or rule) in which tenants can negotiate with landowners to get a share of this money (can nudges help?), the money is withdrawn and utilised in the most productive manner (again nudges, say, to purchase farm inputs?), the float in the distribution channel by way of locked up money due to deaths etc be minimised (can technology help?), discourage farmers who could leave land fallow and just collect the transfers (some information disclosures and structuring of the payments be of use?) etc. 

As can be seen, each of these problems can have unique ways to address them. The government would need to innovate improvise continuously. 

Addressing these execution challenges and ensuring that the reform realises its full value would require action at three levels.

The first would be purely at the level of execution management. Can we have a monitoring system with tight feedback loops that inform decision-makers at District and State levels about bottle-necks, distortions and problems as the implementation proceeds (say, larger and absentee farm owners leaving land fallow to collect the transfers which is higher than the tenancy rent)? Can there be a back-up team which can respond to such emergent concerns and address them swiftly, both at the policy level as well as, more likely, at the level of field implementation? Can we have a strong analytics team that is able to rigorously analyse the data exhaust and offer actionable insights, which can perhaps help iterate and improve the policy over time?

The second would be at the level of policy elements. Can the State government emulate the Giveitup campaign associated with the LPG subsidy program of the Government of India and nudge the richest farmers to voluntarily abstain from taking the subsidy? What would be the most effective way to exercise such moral suasion? Given that 9% of farmers with more than 5 acres each own a third of the land and therefore would claim a third of the subsidy, can the government go one step further and cap the subsidy in an administratively simple manner? Going forward, as the farmer database and transfers distribution channel stabilises, can the government explore options of targeting farmers, crops, regions etc? 

The final level of engagement would have to be at the eco-system. Gradually, after a year or so of the implementation, can the database and monitoring system be used to deliver other types of services? How does this work-flow integrate to the fertiliser subsidy transfer system? Can the foodgrain procurement process be linked up with this database? Can this be linked to the agriculture e-market place, eNAM? Can we use this digital spine to deliver direct cash transfer in return for erecting meters on agriculture power connections? Can we gradually build a robust agriculture information management system and a platform to deliver various kinds of farm services?

It is all too easy for me to write these down as a sort of pre-mortem. In fact, I could dig deeper and get more granular at each level. It is an altogether different task for the State government to just keep its eye on all three levels always, much less translate them into action. The best that can be expected is for the State government to perform reasonably well the limited task of high fidelity execution. That is a two-year agenda.

For now, despite all its flaws, the state government should be applauded for the leap of faith, as is the case with any such reform.

It does not need any great foresight to assess how the program will get implemented, if it is done business as usual by the State government. It is almost unrealistic to expect a state government, even a very high capacity one at that, to execute at all three levels. Even high fidelity execution will be a great achievement. The ebbs and flows of political cycles alone are enough to disrupt any neatly laid down plans at policy and eco-system levels. No point in criticising State government for such failings. We only need to be surprised if that does not happen. 

None of this would prevent opinion makers and academic researchers from sitting judgement five years hence, and with the benefit of hindsight smugly castigating the government for all the distortions and failings (some which cannot even be anticipated now) that would have inevitably crept into the implementation - it was not evidence-based policy making, there was corruption, there was no political commitment, the tenants and therefore the poorest farmers did not benefit, and so on. We told you so! 

Instead, the challenge is to engage in real time. Can evidence-based policy making ideologues offer the State government something tangible in terms of the aforementioned engagement elements that increases success likelihood as it embarks on this challenging reform path? Anyone up for that challenge?

More on the distortions around NREGS

The National Rural Employment Guarantee Scheme (NREGS), as the name suggests, is an unemployment insurance program for the rural poor. In simple terms, the government steps in as the employer of last resort, with a minimum wage guarantee, if the labourer is not able to find employment in the regular market.

However, an article in The Times of India on 18.1.2012, about an apparent lack of interest for NREGS in Warangal, is a very accurate reflection of the misconceptions about NREGS and its gradual slide from being a demand-driven to a supply-driven program.

The central government’s flagship programme MNREGS has not found many takers in Warangal. This when the district had bagged first place in the state last year in providing work to farm labourers under MNREGS and spent huge funds on works... this year Warangal has fallen to 15th position in the chart... At the recent vigilance and monitoring committee meeting, it was revealed that MNREGS implementation in 2011-12 has come a cropper... According to District Water Management Authority (DWMA) officials, the farm workers are not showing any interest to carry out the MNREGS works as the private sector is ready to pay more for their work.

In states like Andhra Pradesh, even in Warangal, NREGS can no longer be considered as not having takers because of lack of awareness or other high access barriers. In the circumstances, the low demand this year, especially in the backdrop of last year's excellent performance, is most likely to be due to reduced demand. However, instead of viewing the drop in NREGS enrollment this year as an indicator of a stronger economy and more private sector job opportunities with increased wages (say, private farm labour wages having risen, making it more attractive over NREGS), the newspaper article considers it a governance failure.

Such an understanding of the NREGS, representative of the mainstream view of the program, will come in the way of any exit strategy, even if the market is able to provide employment at higher than the NREGS wages. This conception arises when we view NREGS as an end in itself, rather than as a means to insure or protect against a market failure or deficiency. Ironically, its success may itself prove to be NREGS's greatest failing!

Price controls are back?

The Andhra Pradesh government has announced its decision to set up a price monitoring committee to control inflationary pressures.

Taking serious note of the rise in the prices of essential commodities, Mr. Kiran Kumar Reddy announced plans to form a price monitoring committee to tackle the situation. The new mechanism will not only deal with people involved in hoarding and black-marketing of produce with an iron hand, but also play a key role in fixing prices.

"Fixing prices"? Hmm!!

Observations on the Aarogyasri program

Aarogyasri is a hugely popular health insurance program initiated the Government of Andhra Pradesh. Administered by a government-run Aarogyasri Trust, it covers all the below poverty line (BPL) citizens, and provides for pretty much the entire spectrum of high-value tertiary treatments. In the language of insurance, the Aarogyasri is a single-payer (government), mandatory coverage (for all BPL families), pure community rated (same insurance rate for all those covered) insurance scheme.

Its supporters point to four features of the program as proof of its widespread appeal. One, it covers all the major medical conditions, with a generous coverage of upto Rs 2 lakh per family every year. Two, it provides un-paralleled choice to patients, giving them the freedom to choose any hospital, government or private, for their treatment. Three, it provides for completely cashless treatment in any of the empaneled hospitals. Four, the scheme incentivizes government doctors by earmarking a share of the payments recieved by their hospital for treating Aarogyasri cases to the doctors and staff.

However, it is precisely these four attractions that form the basis of concerns about its long-term sustainability.

1. The universal coverage is a red herring. In reality, the supply-side is severely constricted by the available treatment facilities. In fact, even with the spurt of private hospitals in the wake of the program, less than a quarter of patients suffering from a covered medical condition are likely to be treated under the scheme.

Herein lies one of the biggest challenge for the scheme. If the present trend continues, more private hospitals will crop up, if only to exclusively service patients covered by the scheme. This will in turn increase the available treatment facilities and thereby the actual claims processed by the insurer. It is inevitable that premiums will keep going up for years to come, merely due to the addition of new treatment facilities.

As the numbers of private hospitals increase, there will also be increased pressure to expand the pool of covered procedures. This too will drive premiums north. Adding to all this will be the universal trend of rapidly increasing medical treatment costs. Will the government budget prove deep and resilient enough to meet all these upward pressures?

2. The level of patient choice in Aarogyasri is simply unprecedented, a luxury not available to even patients in many developed economies. Given the state of government hospitals and the incentives of private and government hospitals (the former have no incentive to chase patients), patients are more or less certain to prefer the former. This would be a shame since most government secondary and tertiary care hospitals have well qualified doctors and adequate diagnostic and surgical devices, though the quality of service delivery is questionable. Questions will invariably have to be asked about whether it is possible to leverage the Aarogyasri program to improve the quality of service delivery in government hospitals.

3. Related to the previous point, the prevailing government policy on secondary and tertiary healthcare provides for no synergy between the government's own single-payer Aarogyasri health insurance program and its existing secondary and tertiary care facilities. In fact, they are each considered distinct and mutually exclusive. This is unlike the health insurance model in most western countries, where there are strict protocols for referrals, with cases being referred to private hospitals only when government hospitals are unavailable.

An application of the same model would have brought in the government hospitals as a major health service providers in the Aarogyasri scheme through a similar protocols-based sharing of cases between them and private hospitals. It would also have enabled resource-strapped Government hospitals to access payments from the Aarogyasri program. This cash flow becomes all the more important since the state government reduced its budgetary allocation to all these hospitals in lieu of the Aarogyasri allotment. In simple terms, the budgetary allocations to Aarogyasri and existing government hospitals being a near zero-sum game (net allocation being more or less the same), the private hospitals benefitted at the cost of the government hospitals.

4. Further, once the patient is admitted by the private hospital, given the pay-per-intervention payment system, their incentives are strongly aligned towards over-treatment. Since the treatment is cashless, the incentives of the patient are aligned towards accepting the "best" available treatment. Unfortunately, in the prevailing model, the incentives of the doctors are aligned towards projecting expensive invasive surgical procedures as the "best" option. For example, irrespective of the medical condition and the age profile of the patient, irradiation therapies are generally preferred (by both doctors and patients) over medication. In simple terms, the most aggressive treatments have become the standard of healthcare.

In standard insurance schemes, insurers have to keep a strict vigil on the pre-authorization process (when the tests are done and the patient is screened for a particular surgery/therapy) so as to minimize over-treatment. This is all the more so since the payments to health service providers (doctors and hospitals) are on a pay-per-procedure/intervention basis, as against the less distortionary fixed payment for treatment of a medical condition.

The Aarogyasri program too makes payments to hospitals based on a pay-per-procedure basis. In fact, the tender premiums quoted by the insurers are based on this premise. The Trust prefers this approach since it believes that its in-house pre-authorization process is rigorous enough to effectively screen patients and prevent over-treatment. In fact, effective pre-authorization is the forte of the best Third Party Administrators (TPAs) hired by the insurers. If the Aarogyasri Trust does this effectively, then it has to be counted among the most effective TPAs. In any case, as the program expands, maintaining such rigorous pre-authorization process will become difficult.

However, unless it moves away from the in-house pre-authorization process to a purer insurance model, it may not be possible to change the payment model. A medical condition based payment approach is much more complex to administer and riskier too and may not be possible with an in-house model of pre-authorization.

5. In simple terms, the incentives under the Aarogyasri scheme offered a cash reward top-up to doctors for doing much the same procedures which they were doing through their regular hospital in-patient channel. This has the potential to create a moral hazard - the doctors who internalize the incentive and do these procedures come to slowly view these incentives as entitlements.

This turn of events can damagingly distort the incentives facing doctors, especially if at some point in time the government decides to abandon Aarogyasri and decides to revert back to the old model of government institutions based health care. Further, it cannot be denied that atleast some doctors are likely to be disincentivized in taking proper care of patients not covered by Aarogyasri. Also, what about the cash incentive crowding out intrinsic motivation?

Aarogyasri incentive structuring is a powerful example of the need to exercise great caution when we introduce performance-based pay systems into government bureaucracies. Unless carefully structured, cash incentives not only distorts the current implementation, but it also generates adverse expectations which come in the way of future implementation of performance based pay. In some ways, this is similar to a situation where a doctor abruptly replaces a commonplace but effective drug with a powerful new medication against a particular virus/bacteria, only to find after some time that the second generation drug too is losing sting, leaving us with limited available options to effectively treat the microbe.

So what can be done to make the Aarogyasri program more cost-effective without radically tinkering with its existing model?

For a start, it is imperative that there be a clear protocols-based system of referrals, so that the existing government facilities are more closely integrated into the Aarogyasri scheme. The government hospitals benefit by way of accessing more funds and thereby better diagnostic and surgical facilities. It will also help the government accommodate the massive budgetary support that is inevitable in the coming years as the scheme grows.

A treatment facility wise mapping of government hospitals can help route Aarogyasri patients to those hospitals for specific medical conditions. Only those cases which cannot be treated in these hospitals (for either lack of bed space or lack of required facilities) should be referred to private hospitals. Simultaneously, there should be a vigorous campaign to improve service delivery standards in secondary and tertiary hospitals.

The incentive system for government doctors provided for under the Aarogyasri scheme has to be either dismantled or be made more nuanced. If the later is preferred, the incentives should kick-in only after a certain performance benchmark is breached.

Under the Aarogyasri scheme, the insurance premium quoted by the insurer is a function of the number of procedures/therapies covered, N, the respective price (to be paid to the hospital) fixed for each surgery/therapy (or medical condition) i, Pi, the number of empaneled hospitals (or number of available treatment beds for each surgery/therapy i), Ei, and the disease incidence risk among the population pool insured for each medical condition i, Ri.

In other words, Premium, Pr = f(N)+g(Pi)+h(Ei)+q(Ri)

Insurers seek to ensure that their expenditure due to claims and administration costs is lower than the premiums collected.

Of these, the most important parameter is the prices of procedures. Neither the insurer nor the health service providers have an incentive to control it. The health service providers are the direct beneficiaries of higher procedure rates and therefore lobby hard for maximizing procedure prices. The insurers merely pass on these higher prices on to the consumers by way of higher premiums.

The insurer seeks to minimize his claim outgo either by limiting the number of empaneled hospitals (so that the numbers of cases that can be treated is controlled) or turning away (on some pretext or other) those who claim treatment. Both these problems can be addressed. The former can be mitigated by defining the list of empaneled hospitals in the tender itself, including those which are likley to be added each year and details of when they will become operational. Since the premiums are revised each year and it takes atleast an year for establishing any hospital, such up-front disclosure is not likely to create any problems. The later can be overcome by making it mandatory to treat all the patients pre-authorized by the Aarogyasri Trust.

Both the aforementioned conditions, coupled with upfront disclosure of number of surgeries/therapies, transparent fixation of prices for each procedure, and government-run pre-authorization can substantially align the incentives of all parties. If these conditions are fulfilled, the insurer's bid would be determined purely based on his actuarial risk calculation for the insured risk pool and their administration costs. Such bids are more likely to generate efficient outcomes, since it increases the likelihood of the successful bidder also being the most efficient insurer.

On structuring lease concessions

The Hindu reports of a concession agreement signed between the Andhra Pradesh Tourism Development Corporation (APTDC) and a private hotel operator, Amogh Group of Hotels, for leasing out one of APTDC's centrally located Tourism complex in Hyderabad. Under the 15 year lease, terms of which have been arrived at through an open competitive bidding process, the private operator will be allowed to run the 84 room complex as a three-star hotel. The operator will pay Rs 23 lakh per month as rental fee and also provide 20 rooms to the state General Administration Department (GAD) for accommodating state guests.

This apparently simple lease agreement could be the setting for a simple thought experiment. The APTDC and state government's desired objectives are two-fold - accessing 20 rooms for the GAD, while maximizing the lease rental. There are two possible approaches to achieve this objective. One, as the APTDC has done, is to clearly state upfront the 20 room GAD requirement and then invite hotel operators to quote on the lease rental. Alternatively, treat the two as separate requirements and then let the private operator quote a lease rental for the entire hotel. Subsequently, the 20 rooms can be leased in either on mutually agreeable terms from the the same operator or a separate tender can be called for leasing in 20 rooms from any private hotel across the city.

Which of the two approaches is likely to be more beneficial - generate higher net returns - for the state government? An examination of the incentives and option values that bidders face would be illuminating.

In the first case, the operator factors in the costs and benefits of already having committed the 20 rooms. At a cognitive level, he has made two trade-offs - one on the lease rental amount for the 64 rooms and another on the lease amount that he sets-off against the 20 rooms. I am inclined to believe that he makes them as two separate decisions, under-weighting (or minimizing the rent pay-out) the first and over-weighting (maximizing the rent receipt) the second. There is also the option value he attaches to having foreclosed the option of retaining all the 84 rooms. In other words, there are atleast three factors that influences his decision, all of them having the effect of working towards keeping down the lease rental payout to the government. The multiplicity of incentive factors, all working separately, distorts the decision-making environment and each works towards bidding down the quotes.

In the second case, the operator is primed into bidding for the entire property and retains the option of whether to give or not give the 20 rooms. To that extent, the option value is discounted in the bid. There is considerable clarity in the bidding environment. The only factor working in the bidder's mind is to get the best possible deal on the lease rental. In this case, the competition between bidders will work towards keeping all the bidders honest.

After the hotel, with all rooms, is bidded out, the government could negotiate and seek mutually agreeable lease terms. Alternatively, it could call tenders for leasing in 20 rooms from any existing hotel, within certain areas of the city. Either way, more so with the second approach, there would be more efficient price discovery with respect to the lease rental for the GAD rooms. It is possible that there are certain private hotel operators who would want to use the signal of government business to improve their hotel business itself and would therefore quote at a discount.

The populist assualt on incentives - MFI loan defaults

I had blogged earlier about a study by Citigroup economists Willem H. Buiter and Ebrahim Rahbari where they identified factors that could affect future global economic growth. One of the more interesting factors pointed out was the dangers to growth genereated by "the populist assaults on the incentives to work, save and invest". Here is one such example.

Mint quotes Vijay Mahajan of Basix who claims that, thanks to the state-wide default on Microfinance Institution (MFI) loans by self-help groups (SHGs) in Andhra Pradesh, there could be "92 lakh households in Andhra Pradesh who are appearing on the defaulters list of the National Credit Bureau".

Even assuming an element of exaggeration in the figure, it is an extraordinary situation. As far as I can remember, this is the first truly big example of a full-scale debt default by a large section of population. Unlike the loan waivers, where governments decree to write-off loans, here is an example of borrowers deciding to collectively and unilaterally extinguish their debt obligations, without abrogating their loan contract with the MFIs.

First, there is the legal-technical issue of these defaulters, forming a major share of SHGs and women in Andhra Pradesh, losing their credit-worthiness in a single stroke. How would the banks classify or risk-weight future loans to this massive category of borrowers?

More importantly, the larger message that would have been internalized by these women and their communities is that their contractual obligations to their lenders is no longer sacrosanct. The hitherto entrenched belief among borrowers that their private debt will always have to be re-paid is now shaken (the loan waivers have long since shaken this belief on government debts).

Similarly, lenders, of all kinds (who lend to these people), will now be aware that the credit risk of their borrowers have suddenly spurted. Markets will price it accordingly, with higher rates and stronger conditions, which in turn will adversely affect access and hurt borrowers. Unfortunately, this moral hazard is not limited to just borrowers and lenders. It covers all forms of contracts, and this is an even bigger concern.

As standard economic theories have taught us, a market economy is underpinned by bonds of loyalty and trust which facilitates contracts that form the basis of most market-driven transactions. There are a number of studies which have shown that developing countries have weaker contract obligation and enforcement capital and they are binding constraints on economic growth in these economies. The MFI default would surely have diminished the already limited contract capital available in such societies.

In this context, governments need to ensure that their policy decisions do not distort incentives. In the instant case of MFI loan defaults in Andhra Pradesh, even if the government wanted to punish the MFIs, it would have been appropriate if it was done without distorting incentives.

One approach would have been to, in some form, recover the loans through the regular government SHG institutions, with or without interest. The recovered amounts could then have been returned back to the banks that financed the MFIs. This would have punished the MFIs, who would have been deprived off their profits and would suffer credibility loss, without distorting borrower incentives nor causing loss to the financial institutions that funded the MFIs.

Why incentives alone are not enough?

Econ 101 would have it that successful public policy is that which is designed with appropriately aligned incentives. However, the complexity of the real world means that when implemented, many of these incentives, doubtless laudable when seen in isolation, results in often undesirable outcomes. Here is one recent example.

Under the popular Arogyasri health insurance program run by the Government of Andhra Pradesh, government hospitals and its doctors are incentivized by way of cash payments for each patient treated. The presumption is that once the incentives are appropriately aligned, government hospitals would be able to attract patients under the scheme and use the incentive amounts to improve infrastructure and buy equipments.

However, it has been found that this incentive architecture has not been adequate to get government hospitals to attract patients under Arogyasri. Here are two possible reasons, which also informs us about the complexity involved in designing public policies.

1. It is an open secret that many government doctors, especially specialists, practice in private hospitals outside their regular working hours. There is evidence to suggest that these doctors are being offered much higher incentive payments by the private hospitals for every patient treated under Arogyasri. In fact, the government doctor even becomes a link to attract the patient to the private hospital. In other words, there is an unforeseen and even bigger incentive at work that nullifies the incentive structure built-into the scheme.

2. Most government hospitals do not have the required basic physical infrastructure and equipments to carry out many of the procedures. Further, even when they do have the equipments, the hospital environment is not conducive to attracting patients and for performing surgeries. Most often, the doctors in government hospitals face problems from lack of electricity or water, absent or recalcitrant nurses and attendants, equipments facing minor repairs or without consumables, and so on, all of which come in the way of their work. In contrast, in a private hospital, the doctor can merely walk into the operation theatre and carry out the surgery without any concern for managing the hoospital environment.

Therefore, despite the presence of the all facilities, patients prefer the private hospital and doctors exhibit an inertia to carry out operations. The last-mile cost imposed by the environmental challenges and the resultant behavioural inertia to do surgical procedures in the hospitals is often large enough to prevent the treatment getting carried out in the hospital despite the incentive to do so.

Both these reasons again highlight attention to the fact that while structuring incentives is necessary, it is far from adequate to ensure the achievement of public policy objectives. In this case, perversely enough, the program may have had the effect of widening the existing deep divide between government and private hospitals and creating a new divide between the good and poor government hospitals.