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.

Are SHGs a public good?

Over the past year or so, the micro-finance movement has been the subject of intense scrutiny, faced with charges of fraud and exploitation. In Bangladesh, the Grameen bank and its iconic founder Mohammed Yunus have been accused by the Government of accounting fraud and diverting money. In Andhra Pradesh, micro finance institutions (MFIs) have been found indulging in practices that exploit the poor.

I have already blogged and written about these allegations and will not dwell on them here. Suffice to say that there are critical procedural/administrative problems and more importantly, serious corporate governance issues with many MFIs. In the absence of meaningful steps to address them, there are strong headwinds against any sustainable progress for the MFI model.

However, there are two interesting macro-perspectives from this debate, especially in Andhra Pradesh, that deserve greater discussion.

1. There is the argument that the spectacular success of MFIs in Andhra Pradesh overlooks the role of the government in creating a million-strong Self Help Groups (SHGs) that the MFIs could readily use (a la "ready cooked food"). There is palpable resentment at the fact that the MFIs, who merely walked in and piggy-backed on the fruits of the state government's efforts of more than a decade to develop SHGs, are claiming and getting a disproportionate share of the credit for the success of micro-finance activities in Andhra Pradesh.

In fact, the officials of the state government have even gone on record to argue that MFIs should confine themselves to non-SHG lending, "They cannot make profit by lending to the poor. Let them lend to the rich and make profit and leave welfare of the poor to the Government."

Without getting into the merits of how the credit for the success of micro-finance should be apportioned, it may be useful to examine what should be respective roles of the government and private sector in such areas.

Clearly, there are two distinct activities - formation and strengthening of SHGs and micro-lending to these SHGs. The strength of the former determines the success with the latter. In other words, SHGs form the fixed social infrastructure on which micro-finance rides.

I am inclined to see striking parallels between SHGs and classic public goods. It is now well-documented that apart from being channel to funnel credit to the poor, SHGs also play a critical role in women's empowerment and is a platform for enhancing the effectiveness of government interventions in many areas. Therefore, the net social benefits of SHGs exceed its net private benefits to the agency forming such groups. Private agencies like MFIs will naturally have less of an incentive to invest time and resources in forming SHGs.

In the circumstances, as is the case with public goods, it may be appropriate if governments focus on the formation of SHGs and invite the private sector to play a greater role with micro-lending. This does not mean an exclusive role for each in their respective areas, but a major role. So the way forward may be for governments to focus on forming SHGs and strengthening them, and for private sector to partnering with governments in increasing the volume of micro-lending. And all this assumes that the governance and other problems related to MFIs are largely resolved.

2. The second issue is related to the respective roles of the government and the private sector in combating poverty. More specifically, the success of the MFIs (most conspicuously, the success of SKS with its IPO) has generated a strong feeling that MFIs are making super-normal profits by exploiting the poor. This in turn raises the issue of what should be ethical standard for private agencies working in the area of development, the so called social enterprises.

Is it alright for a private social enterprise firm, playing by the rules of the game (assuming that the rules are themselves fair), to make profits even as it delivers on certain social objectives (as being delivered through the regular government initiatives)? In this case, is it acceptable if MFIs follow the rules, make micro-loans, and in the process also make handsome profits? Or should their profits be capped at some level? Or should the cost of lending be brought down and thereby reduce the excessive profit margins? Or should a share of their huge profits be ploughed back into helping the poor in some other effective manner?

In other words, is it acceptable for a private social enterprise, functioning with its capitalist efficiency and playing by the letter and spirit of the rules of the game, to work towards the objective of maximizing its profits?

The unintended consequences of road widening

Road widenings are commonplace across cities in many developing countries. Cities in these countries are a work in progress, the chaotic and unplanned result that emerges from a series of piece-meal developments. The need for road widenings are the inevitable result of such development.

Among all the major Indian cities, Hyderabad has been at the forefront of road-widenings. All the major city roads have been subjected to atleast one, sometimes multiple rounds, of widening. The state and local governments have innovated on several approaches to obtaining the consent of land losers and acquiring land.

However, there are a few unintended consequences of such widenings. I am inclined to the argument that unwittingly road widenings have turned Hyderabad into a city without footpaths and where hawkers run riot on road margins.

1. Public perceptions of road widenings are restricted to widening of the carriage-ways. However, such widenings are accompanied by a series of other actions - construction of drains and footpaths, and shifting of utility services (water, sewerage, telephone, and electricity lines). In fact, carriage-way expansion forms only a small share of the total cost of widening. All these accompanying activities involve co-ordination across numerous departments and therefore take time.

However, local governments start on road widenings with limited resources, most often only enough to cover the carriage-way and at the most, drains. Further, given the long drawn out nature of the work, the carriage-way is laid over the utility lines (and this explains the frequent cuttings on newly laid roads!). Footpaths are invariably given the short shrift.

It is therefore no surprise that in comparison to cities with less road widenings like Chennai and Bangalore, Hyderabad roads suffer from lack of footpaths. In fact, Hyderabad could count as one of the most pedestrian unfriendly cities.

2. Another feature of road widenings is the irregular nature of the widened roads. This is a result of the refusal of certain individuals along the alignment to part with their lands and the court litigations that invariably follow. The non-shifting of electricity poles and lines, coupled with the aforementioned problems with land acquisition ensures irregularly developed carriageways. In the absence of footpaths, these irregular spaces (which cannot be used as carriage-way) get occupied by street hawkers.

This problem of under-utilized carriage-ways is also a result of way in which road widenings are carried out. Urban planners frame the issue as one of expanding width instead of adding lanes. Width becomes the negotiating point, thereby creating roads with anomalies like 2.5 and 3.5 carriageways. I have blogged earlier about the implications of such framing.

Observations from communal marriages

For the past five years, the Tirumala Tirupati Devasthanam (TTD) has been organizing mass marriage programs, "kalyanmastu", across the state, with the objective of helping poor people to get married without running up debts, promote Hindu culture and counter missionary propaganda.

TTD gifts each couple (from the below poverty line families) with a gold mangalasutram, silver toe rings, and a set of wedding clothes to the couple, and to an attendant. It also hosts feast for sixty people from each couple's side, and provides free darshan for six members belonging to the bride and bridegroom family at the Venkateswara temple at Tirumala.

So far, more than 35000 such weddings have been conducted as part of the Kalyanamastu. It is estimated that TTD spends about Rs 10000 for each couple. Here are a few observations from the latest round at Hyderabad.

1. It is undeniable that poor people incur considerable expenditure in organizing marriages and large debts are an inevitable legacy of a marriage. Apart from lowering marriage ceremony expenditures, such unions are less likely to involve dowries.

Since everyone gets married, incur considerable expenditure on their marriage ceremony, and the resultant debts impact a larger number of people (families of both, especially the bride), mass marriages offer a considerable welfare dividend. In many respects, it is equivalent to a large one-time cash transfer.

2. Like all government interventions involving dispensing some benefits, such mass marriages are also vulnerable to leakages. There is the strong possibility that atleast some of the couples already had their wedding recently and have been tempted by the incentives (especially the free darshan). What increases its likelihood is the fact that government officials are given targets to mobilize couples for such weddings.

3. Private marriages are deeply personal events. At a cultural level, arranged weddings are most often sustained, atleast in the initial stages, by the powerful influence of traditions and conventions. The strong memories of the marriage ceremony itself, in the exclusive presence of friends and relatives, will serve as a powerful binding force.

Does the impersonal nature of mass-marriages mean that its psychological impact on the couples are not deep enough? Put differently, it may be fair to say, the contribution of the memory of the marriage ceremony itself towards sustaining the marriage (atleast for the first few years) will be smaller for such mass-marriages.

4. Do such weddings encourage love-marriages, where couples elope to get married? Since the couples incur no expenditure and since they are impersonal occasions (given the large numbers of marriages taking place), they provide an excellent platform for couples fleeing to marry in relative anonymity.

5. What has been the longevity of such marriages? For all the aforementioned reasons, there is atleast a reasonable theoretical case that such marriages may not be as adhesive as the regular private marriages. But then, the fact that these weddings are taking -place before Lord Balaji could offset some of the perverse incentives.

In any case, communal marriages throw up numerous opportunities for immediate individual-level incentive changes and longer-term sociological changes.

Observations from liquor license auctions

The Andhra Pradesh state government raised a massive Rs 6904 Cr in the recently conducted auctions for two-year liquor retail sales licenses for 6596 retail outlets across the state from a record 48600 bids. This is in comparison to the Rs 3200 Cr received for the 2008-10 auctions from 20000 bids.

This means that, coupled with the excise and sales tax receipts on the liquor sold, which is estimated to be double the auction amount, the excise department is expected to be the highest revenue earner for the state government topping the traditional commercial taxes department. These auctions have highlighted several interesting examples of economic incentives at work.

1. Under the existing state government policies, the number of retail licenses have remained frozen at 6596 for almost a decade now. The geographical distribution of these licenses are such that while the towns and cities can have more than one shop, based on the population and some other parameters, only one license is issued in each mandal (the small administrative unit in the rural areas with a population of about 40000 to 1 lakh, of which there are nearly 1100 in the state).

The single license holder in each mandal assumes all the characteristics of a classic monopoly. This automatically contributes towards increasing the premiums on bagging license rights, especially for rural areas. This is borne out by the fact that the rural areas witnessed the most intense competition, evidenced both in the numbers of bidders and the amounts bid. In fact, the higest bid of Rs 5.21 Cr came for a shop in Nadikudi village of Dachepalli mandal in Guntur district and several other bids for mandals were higher than Rs 3 Cr.

In these areas, given their monopoly character, these outlets become the single point dispensing counter for the numerous illegal outlets that invariably dot the rural landscape. Further, given the intimate relationship between crime, liquor, and political power, a successful bid confers on the license holder a powerful source of patronage.

2. Apart from licenses for retail sales outlets, the excise department also issues license for serving liquor - bars in urban areas and permit rooms in rural areas. These license fees are fixed by the government and its revenues are a small percentage of the collections from retail shop auctions. In the rural areas, the successful bidders for retail sales are provided the choice to bid for one permit room (attached to the license holding retail outlet) on payment of some small additional amount. In other words, while there are multiple (though restricted) serving centers in each urban area, there is only one legally permissible serving center in each mandal.

The aforementioned architecture makes retail liquor sales business very constricted, especially at its downstream end. While the outflows (from the retail outlets) are massive and growing, the consumption end is serviced by a limited number of bars and permit rooms. In the absence of adequate numbers of institutionalized formal centers for serving the massive quantities of liquor flowing in, informal centers inevitably spring up. This restriction opens up another parallel market - in illegal "serving rooms" (attached to both licensed retail outlets and the numerous illegal ones). It is an open secret that most, if not all, the retail outlets and their numerous illegal off-springs function as sales-cum-serving centers.

3. In many respects, liquor retail licenses and bar/permit room licenses are complementary goods. Every few retail outlets have to be serviced by some legal serving rooms. A market design where there are downstream restrictions on the numbers of bar/permit room licenses (even as consumption is increasing) is only bound to increase the premium on upstream retail sales licenses.

In other words, the retail license bidders have internalized the (the one legal permit room and illegal serving rooms) benefits that accrues from their ownership of a retail license, and have priced that into their bids.

4. Though the permit room licenses are obtained relatively cheap at the margins (for a few lakhs of rupees in comparison to the crores paid for shop license), it is commonly found that less than half the license holders prefer to take them. Since all of them invariably end up serving liquor in their outlets, those without permit room licenses presumably do so because the cost of evading detection of their illegal activity is less than the price of the permit room license. In other words, especially given the fact that the permit room license itself is relatively cheap, the enforcement officials of the Prohibition and Excise Department are selling themselves too cheap!

5. Interestingly, another contributory factor to the over-sized bids may have been the economic recession which has had the effect of depressing the real-estate market and leaving builders and developers in the search for alternative remunerative investment opportunities. Further, the very large parallel economy resulting from the aforementioned monopoly characteristics offers them an added attraction of acting as an outlet to funnel the massive amounts of black money that had been sloshing around the real estate sector.