A substantial proportion of academic research and policy focus in the education sector revolves around ensuring teacher attendance. This is understandable given the shocking levels of teacher absenteeism that bedevils education in many states across India. However, in so far as the objective of education is the achievement of bench-marked learning outcomes, it may be a simplification to assume that ensuring teachers attend school is enough.
In their now famous randomized experiment of 120 single teacher schools run by Seva Mandir in Rajasthan, Esther Duflo and Rema Hanna had monitored the impact of teacher attendance, captured using a tamper-proof date and time function camera, on learning outcomes. This camera was provided to teachers, along with instructions to have one of the children photograph the teacher and other students at the beginning and end of the school day, and their salary was linked to attendance.
They found that absence rate (measured using unannounced visits both in treatment and comparison schools) changed from an average of 43 percent in the comparison schools to 24 percent in the treatment schools. Learning levels too improved - a year after the start of the program, test scores in program schools were 0.17 standard deviations higher than in the comparison schools and children were 43 percent more likely to be admitted into regular schools.
The reality though is more nuanced. Getting a teacher to school is just the first step, undoubtedly important in so far as it increases the likelihood of achieving learning outcome objectives. Though, as the aforementioned study and others point to the fact that teacher attendance improves learning outcomes, as it should, the extent of improvement is debatable. And many of these studies reflect a very low baseline (especially true of many North Indian states where teacher attendance is the exception) and may therefore point to an exaggerated impact on learning levels.
In fact, attendance related effectiveness is conditional on two subsequent actions - going to the classroom and communicating effectively with the students. And as we know, both, especially the later, are formidable challenges in themselves. If we think that ensuring morning attendance solves the problem, be prepared for a shock to know that leaving the school early is an equally big problem. In view of all this, ultimately any reliable assessment of school performance will have to come from objective measurement of learning outcomes.
In other words, the returns (in terms of achievement of learning outcomes) from merely getting teachers to school, while significant, do not constitute a large enough step in ensuring the achievement of learning outcome objectives. This is because this objective is so intimately and exclusively dependent on the cutting-edge action - the process of teaching and learning - and this itself is not exclusively or (for some categories, as baseline levels improve) maybe even substantially (as is being imagined) dependent on the mere physical presence of the teacher. In fact, class-room teaching (and the quality of its outcomes) is more a function of the individual skills, capability, and motivation of the teacher than any other exogenous intervention.
In contrast, atleast to the extent of primary health care and first referral facilities, just getting the doctor to the hospital is more closely related to the achievement of final (hospital-related treatment) health care objectives. There is only a remote likelihood of a doctor turning away waiting patients or be lackadaisical and less rigorous in his treatment advice.
Does this mean that it will deliver greater bang for the buck to have expensive devices like biometric attendance readers in place for monitoring the attendance of doctors and nurses as against teachers, atleast to start with? Or does the reality of very high absenteeism and low learning levels in many Indian states mean that there are considerable low hanging fruits to be plucked with teacher attendance itself?
Finally, in view of the fact that improved learning outcomes necessarily require teacher attendance, there a very strong case to be made out that irrespective of what is done to improve teacher attendance, objective (by an independent third party) assessment of learning outcomes is a fundamental requirement.
Thursday, October 7, 2010
What Europe means to Europeans
Fascinating series of graphics (via MR) about how different countries in Europe see their other continental neighbours.
Europe according to the French
According to the Russians
According to the Italians
And according to the Americans
Europe according to the French
According to the Russians
According to the Italians
And according to the Americans
Tuesday, October 5, 2010
Why wealth redistribution policies prevail?
I had blogged earlier about the dominance of wealth redistribution policies over wealth creation ones in India's poverty elimination strategies. Here is a possible political economy explanation for this skewness in priorities.
There are certain inherent characteristics of wealth re-distribution policies that endear them to the political establishment. Whereas economic growth oriented wealth creation policies are community-centric, wealth re-distribution policies are aimed at the individual citizen (and voter). The direct connect of the latter with the individual confers an immediacy and salience that rhymes with the dynamics of electoral politics.
Individual-centric wealth redistribution policies involve either direct disbursement of cash or other benefits, both of which are amenable to being pilfered or siphoned off to benefit local rent-seekers. More importantly, the diffuse nature of delivery of such benefits provide rent-seeking opportunities for functionaries at all levels of the political spectrum. In simple language, wealth re-distribution policies are more readily amenable to being populist, though it is possible to provide a populist spin to wealth creation policies.
Apart from the electoral politics line, the dynamics of rent-seeking chain provides another reason for the lack of focus on wealth-creation policies at the district-level. The state and central-level political establishment finds it convenient that decisions on the larger wealth creation policies are divorced from local politics. This is since the grass-roots level political establishment gets greased by the rents from wealth redistribution policies, the more distant wealth creation policies provide fodder for the higher level state and central political classes (commonly by way of extorted shares from construction contractors or project developers).
Unlike the diffuse nature of welfare benefits and consequent small size of possible rents, those from wealth creation interventions are concentrated and larger. Further, a balance sheet of the risks and transaction costs with the returns associated with capturing a share of the former may not look attractive for those at the top of the political pyramid. In the circumstances, preying on the concentrated and relatively risk-free returns from the wealth creation policies look attractive. And critical to this attractiveness is to keep it insulated or separate from district level political or bureaucratic entanglements.
In this respect, the rent-seeking food chain is no different from any other system. While in terms of numbers feeding the chain, the pyramid is regular, in respect of total amounts (rents) being fed upon, the pyramid is inverted (remember the food-chains in drugs trade and other criminal enterprises, made famous by Freakonomics!). In other words, the rent-seeking from wealth redistribution policies (like the various targeted welfare programs) is an example of large numbers feeding on a not-so-large pie at the bottom, whereas that from wealth creation policies is an example of small numbers at the top skimming off the major share from a large pie.
Our elections are fought mostly on competitive populism centered around individual benefits. Therefore it is natural that the delivery of these benefits assume center-stage of local administration and the major share of the work of the District Collectors revolve around them. In contrast, since wealth creation policies do not play a major role in electoral politics, the district administration is not immediately and closely involved in their implementation. Add in the need to keep wealth creation policies separated from district-level decisions, and the skewness in priorities may not be surprising.
There are certain inherent characteristics of wealth re-distribution policies that endear them to the political establishment. Whereas economic growth oriented wealth creation policies are community-centric, wealth re-distribution policies are aimed at the individual citizen (and voter). The direct connect of the latter with the individual confers an immediacy and salience that rhymes with the dynamics of electoral politics.
Individual-centric wealth redistribution policies involve either direct disbursement of cash or other benefits, both of which are amenable to being pilfered or siphoned off to benefit local rent-seekers. More importantly, the diffuse nature of delivery of such benefits provide rent-seeking opportunities for functionaries at all levels of the political spectrum. In simple language, wealth re-distribution policies are more readily amenable to being populist, though it is possible to provide a populist spin to wealth creation policies.
Apart from the electoral politics line, the dynamics of rent-seeking chain provides another reason for the lack of focus on wealth-creation policies at the district-level. The state and central-level political establishment finds it convenient that decisions on the larger wealth creation policies are divorced from local politics. This is since the grass-roots level political establishment gets greased by the rents from wealth redistribution policies, the more distant wealth creation policies provide fodder for the higher level state and central political classes (commonly by way of extorted shares from construction contractors or project developers).
Unlike the diffuse nature of welfare benefits and consequent small size of possible rents, those from wealth creation interventions are concentrated and larger. Further, a balance sheet of the risks and transaction costs with the returns associated with capturing a share of the former may not look attractive for those at the top of the political pyramid. In the circumstances, preying on the concentrated and relatively risk-free returns from the wealth creation policies look attractive. And critical to this attractiveness is to keep it insulated or separate from district level political or bureaucratic entanglements.
In this respect, the rent-seeking food chain is no different from any other system. While in terms of numbers feeding the chain, the pyramid is regular, in respect of total amounts (rents) being fed upon, the pyramid is inverted (remember the food-chains in drugs trade and other criminal enterprises, made famous by Freakonomics!). In other words, the rent-seeking from wealth redistribution policies (like the various targeted welfare programs) is an example of large numbers feeding on a not-so-large pie at the bottom, whereas that from wealth creation policies is an example of small numbers at the top skimming off the major share from a large pie.
Our elections are fought mostly on competitive populism centered around individual benefits. Therefore it is natural that the delivery of these benefits assume center-stage of local administration and the major share of the work of the District Collectors revolve around them. In contrast, since wealth creation policies do not play a major role in electoral politics, the district administration is not immediately and closely involved in their implementation. Add in the need to keep wealth creation policies separated from district-level decisions, and the skewness in priorities may not be surprising.
Monday, October 4, 2010
Narrow funding banks and regulating securitization
Securitization has been blamed as one of the major contributors to the sub-prime meltdown. However, in the debate surrounding financial market regulation reforms, including the Dodd-Frank law in the US, securitization and the platform through which it operates, shadow banks, have not got the deserved attention.
In an interesting recent paper, Yale professors Gary Gorton and Andrew Metrick compared the sub-prime meltdown to a conventional bank run, with the difference being that instead of banks, the shadow banks faced the wrath of investor retreat and capital flight on the back of margin calls and rising uncertainty. From this perspective, just as conventional banks hold and trade in fiat money, shadow banks issue and trade in privately created money (through repos, re-purchase agreements), whose value unlike that of fiat money is deeply vulnerable to market uncertainty. Therefore, it is all the more important that just as regular banks are regulated by strong controls to protect their investors, shadow banks need to be appropriately regulated to protect the buyers of its "money".
They attribute the emergence of the shadow banking system to a three-fold process that involved money-market mutual funds capturing retail deposits from traditional banks, securitization moving assets of traditional banks off their balance sheets, and repurchase agreements facilitating the use of securitized bonds in financial transactions as a form of money. This coupled with "evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions", triggered a boom in the securitization market.
As Gorton and Metrick argue, securitization appeared to create "information-insensitive debt" that could be freely exchanged by people who did not need to check into its quality. At its peak, the role of gatekeepers like the credit rating agencies took a backseat, as a widespread belief in the soundness of securitized instruments took hold. The challenge now is to effectively signal to investors that even senior tranches are not as safe as they seem and therefore investors need to be careful.
Underpinning the securitization market was the safe harbour rules that forbid the securities investors from having any right over the underlying assets (on which the securitization was done). Newly issued rules in the US seek to expand the scope of safe harbour and mandate much better disclosure of loan-level information, limits the number of tranches that can be created in a securitization, etc.
Gorton and Metrick propose the creation of a new category of financial institution, 'narrow funding banks' (NFBs), which would bring securitization under the regulatory umbrella and assure that all repos were backed by high-quality paper. Those narrow funding banks would be the only buyers of securitizations and other investors could buy notes issued by the new banks.
In other words, NFBs would become "the entities that transform asset-backed securities into government-overseen collateral", thereby seeking to ensure (through the more rigorous oversight) that repos are backed by higher quality collateral. They would intermediate as gatekeepers to bridge information asymmetry and signal the quality of assets, thereby mitigating the risks associated with investing in securities. About the underlying philosophy, they write,
I am not sure whether the creation of exclusive NFBs to trade in securitized assets would alleviate the problems that bedevil the securitization market. The fundamental malaise was that the process of slicing and dicing reached a level of complexity that it became impossible to locate and price risk with any reasonable degree of approximation. Further, the gatekeepers who were supposed to bridge the information asymmetry between those peddling these products and their investors, the credit rating agencies, failed miserably to signal the quality of assets created with any reasonable level of accuracy. There is little in the proposals that would address these fundamental problems nor atleast disincentivize them.
Presumably, strict rules on collateral for both securitization and repurchase agreements, coupled with stringent monitoring of these new banks, would mitigate the risks associated with the conventional securitization market. But that does not lend much reassurance since, as aforementioned, most of these were ostensibly in place when the securitization market in sub-prime mortgages blew the bubble. And if "maintenance of this safe harbor is the incentive for agents to abide by the proposed rules", then the same (albeit less rigorous) should have been adequate to dissuade banks from peddling their alphabet soup of collateralized instruments and investors from faithfully gobbling them up.
Worryingly, there is every chance that these NFBs would emerge as the new set of "too big to fail" financial institutions, and much more dangerous since they would house only the opaque instruments. And in the final analysis, any regulatory arrangement that relies on more rigorous monitoring, without addressing the fundamental incentive mis-alignments that generate distortions and excesses, may not have much promise of success.
In an interesting recent paper, Yale professors Gary Gorton and Andrew Metrick compared the sub-prime meltdown to a conventional bank run, with the difference being that instead of banks, the shadow banks faced the wrath of investor retreat and capital flight on the back of margin calls and rising uncertainty. From this perspective, just as conventional banks hold and trade in fiat money, shadow banks issue and trade in privately created money (through repos, re-purchase agreements), whose value unlike that of fiat money is deeply vulnerable to market uncertainty. Therefore, it is all the more important that just as regular banks are regulated by strong controls to protect their investors, shadow banks need to be appropriately regulated to protect the buyers of its "money".
They attribute the emergence of the shadow banking system to a three-fold process that involved money-market mutual funds capturing retail deposits from traditional banks, securitization moving assets of traditional banks off their balance sheets, and repurchase agreements facilitating the use of securitized bonds in financial transactions as a form of money. This coupled with "evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions", triggered a boom in the securitization market.
As Gorton and Metrick argue, securitization appeared to create "information-insensitive debt" that could be freely exchanged by people who did not need to check into its quality. At its peak, the role of gatekeepers like the credit rating agencies took a backseat, as a widespread belief in the soundness of securitized instruments took hold. The challenge now is to effectively signal to investors that even senior tranches are not as safe as they seem and therefore investors need to be careful.
Underpinning the securitization market was the safe harbour rules that forbid the securities investors from having any right over the underlying assets (on which the securitization was done). Newly issued rules in the US seek to expand the scope of safe harbour and mandate much better disclosure of loan-level information, limits the number of tranches that can be created in a securitization, etc.
Gorton and Metrick propose the creation of a new category of financial institution, 'narrow funding banks' (NFBs), which would bring securitization under the regulatory umbrella and assure that all repos were backed by high-quality paper. Those narrow funding banks would be the only buyers of securitizations and other investors could buy notes issued by the new banks.
In other words, NFBs would become "the entities that transform asset-backed securities into government-overseen collateral", thereby seeking to ensure (through the more rigorous oversight) that repos are backed by higher quality collateral. They would intermediate as gatekeepers to bridge information asymmetry and signal the quality of assets, thereby mitigating the risks associated with investing in securities. About the underlying philosophy, they write,
"History has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of strict rules on collateral for both securitization and repo as the best approach for shadow banking, with compliance required in order to enjoy the safe-harbor from bankruptcy."
I am not sure whether the creation of exclusive NFBs to trade in securitized assets would alleviate the problems that bedevil the securitization market. The fundamental malaise was that the process of slicing and dicing reached a level of complexity that it became impossible to locate and price risk with any reasonable degree of approximation. Further, the gatekeepers who were supposed to bridge the information asymmetry between those peddling these products and their investors, the credit rating agencies, failed miserably to signal the quality of assets created with any reasonable level of accuracy. There is little in the proposals that would address these fundamental problems nor atleast disincentivize them.
Presumably, strict rules on collateral for both securitization and repurchase agreements, coupled with stringent monitoring of these new banks, would mitigate the risks associated with the conventional securitization market. But that does not lend much reassurance since, as aforementioned, most of these were ostensibly in place when the securitization market in sub-prime mortgages blew the bubble. And if "maintenance of this safe harbor is the incentive for agents to abide by the proposed rules", then the same (albeit less rigorous) should have been adequate to dissuade banks from peddling their alphabet soup of collateralized instruments and investors from faithfully gobbling them up.
Worryingly, there is every chance that these NFBs would emerge as the new set of "too big to fail" financial institutions, and much more dangerous since they would house only the opaque instruments. And in the final analysis, any regulatory arrangement that relies on more rigorous monitoring, without addressing the fundamental incentive mis-alignments that generate distortions and excesses, may not have much promise of success.
Sunday, October 3, 2010
Marrying price stability and output stabilization with financial stability
Riksbank Deputy Governor and one of the world's leading monetary policy authorities, Lars Svensson has an excellent assessment of monetary policy in the aftermath of the financial crisis,
He rejects the notion that monetary policy was responsible for the financial crisis and blames,
These problems also means that achieving financial stability would need to go beyond price stability (through flexible inflation targeting which he defines as "aiming at stabilising inflation around the inflation target and resource utilisation around a normal level") and interest rate policy and involve use of specific policies and instruments. Interest rates high enough to have an effect on credit growth and asset prices will also strangulate growth in sectors not experiencing any speculative activity (and thereby the dangers of "leaning against the wind").
He therefore advocates that "supervision and regulation, including appropriate bank resolution regimes, should be the first choice for financial stability". He feels that macro-prudential regulation - variable capital, margin, and equity/loan requirements - that is contingent on the business cycle and financial indicators may need to be introduced to induce better financial stability. He writes,
My main conclusion from the crisis with regard to monetary policy so far is that flexible inflation targeting - applied in the right way and using all the information about financial conditions that is relevant for the forecast of inflation and resource utilisation at any horizon - remains the best-practice monetary policy before, during, and after the financial crisis...
A related conclusion is that neither price stability nor interest-rate policy is sufficient to achieve financial stability. A separate financial-stability policy is needed. In particular, monetary policy and financial-stability policy need to be conceptually distinguished, since they have different objectives and different appropriate instruments, even when central banks have responsibility for both.
He rejects the notion that monetary policy was responsible for the financial crisis and blames,
"The factors were the macro conditions (global macroeconomic imbalances); distorted incentives in financial markets (led to excessive leverage and risk taking, and regulatory arbitrage through off-balance sheet entities); regulatory and supervisory failures; information problems; and some very specific circumstances, such as the US housing policy to support home ownership for low-income households."
These problems also means that achieving financial stability would need to go beyond price stability (through flexible inflation targeting which he defines as "aiming at stabilising inflation around the inflation target and resource utilisation around a normal level") and interest rate policy and involve use of specific policies and instruments. Interest rates high enough to have an effect on credit growth and asset prices will also strangulate growth in sectors not experiencing any speculative activity (and thereby the dangers of "leaning against the wind").
He therefore advocates that "supervision and regulation, including appropriate bank resolution regimes, should be the first choice for financial stability". He feels that macro-prudential regulation - variable capital, margin, and equity/loan requirements - that is contingent on the business cycle and financial indicators may need to be introduced to induce better financial stability. He writes,
"Financial stability can be defined as a situation where the financial system can fulfil its main functions of submitting payments, channelling saving into investment, and providing risk sharing without disturbances that have significant costs. The available instruments are, under normal circumstances, supervision, regulation, and financial-stability reports with analyses and leading indicators that may provide early warnings of stability threats. In times of crisis, authorities may use such instruments as lending of last resort, variable-rate lending at longer maturities (credit policy, credit easing), special resolution regimes for financial firms in trouble, government lending guarantees, government capital injections, and so forth."
Why Keynesian models score over classical ones in explaining the Great Recession?
Paul Krugman has a nice summary of why he thinks Keynesian economics triumphs over classical economics in explaining the current macroeconomic environment in developed economies like the US.
First, he argues that unlike the classical paradigm which sees employment and output as determined by the supply-side (and thereby the current unemployment rates are due to structural issues or workers preferring not to work for various reasons), Keynesian models give importance to the demand-side deficiencies. Simple supply-side models cannot explain either the current high rates of interest nor their persistence for this long period. If we taken into account the demand-side, there is an urgent need to boost aggregate demand with expansionary policies that both utilizes idle workers and leaves people with more money to spend.
Second, the classical theory of interest rates claims that increases in the monetary base, due to higher fiscal deficits and fiscal expansion, leads to spikes in interest rates and inflation, apart from crowding out private spending. However, this line of reasoning has not been able to explain the extended period of disinflation and declining interest rates and bond yields despite the increasing deficits and expanding monetary base.
In simple terms, they come up short when faced with the zero-bound in nominal interest rates and the resultant liquidity trap. Keynesian models would indicate that in such conditions, where banks were flush with funds and were without takers from the private sector (or desired savings exceeded desired investment), government borrowings would not cause interest rates to rise or crowd-out private spending. Further, in such liquidity traps, deflation and not inflation was the greater risk.
Update 1`(5/10/2010)
Nancy Folbre has this nice summary of the Keynesian stimulus debate. See these critiques of the structural employment debate here and here. Robert Barro's argument against fiscal spending is made out here.
First, he argues that unlike the classical paradigm which sees employment and output as determined by the supply-side (and thereby the current unemployment rates are due to structural issues or workers preferring not to work for various reasons), Keynesian models give importance to the demand-side deficiencies. Simple supply-side models cannot explain either the current high rates of interest nor their persistence for this long period. If we taken into account the demand-side, there is an urgent need to boost aggregate demand with expansionary policies that both utilizes idle workers and leaves people with more money to spend.
Second, the classical theory of interest rates claims that increases in the monetary base, due to higher fiscal deficits and fiscal expansion, leads to spikes in interest rates and inflation, apart from crowding out private spending. However, this line of reasoning has not been able to explain the extended period of disinflation and declining interest rates and bond yields despite the increasing deficits and expanding monetary base.
In simple terms, they come up short when faced with the zero-bound in nominal interest rates and the resultant liquidity trap. Keynesian models would indicate that in such conditions, where banks were flush with funds and were without takers from the private sector (or desired savings exceeded desired investment), government borrowings would not cause interest rates to rise or crowd-out private spending. Further, in such liquidity traps, deflation and not inflation was the greater risk.
Update 1`(5/10/2010)
Nancy Folbre has this nice summary of the Keynesian stimulus debate. See these critiques of the structural employment debate here and here. Robert Barro's argument against fiscal spending is made out here.
Friday, October 1, 2010
Rural roads - a few observations
I have blogged earlier that among all infrastructure (and any other capital investments) investments, all-weather rural connecting roads will deliver the largest bang for the scarce development buck. Accordingly, a "big push" drive into road investments was suggested.
In this context, an Indicus Analytics feature in the Business Standard quantifies that a rupee invested in rural roads has the potential to generate more than Rs 5 in returns, and that too just from agricultural production. While, the five-fold multiplier estimate will certainly generate dispute, it cannot be denied that the impact is substantial.
The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in 2000, with the specific objective of connecting the 330,000 estimated habitations (out of 825,000) with all-weather connecting roads, and to be financed from a dedicated fund built-up from levy of a special-cess on high-speed diesel. A decade later, 30% of the habitations remain unconnected, thanks to problems with difficult terrain, seasonal limitations on work schedules, need for statutory clearances from the forest department, limitations of qualified manpower and contractors, and nonavailability of dedicated personnel with streamlined institutional arrangements.
Here are a few observations on the issue of rural roads in India, excluding the much-discussed construction bottle-necks.
1. Despite the one full decade of PMGSY, the percentage of unconnected habitations decreased only slightly from 37.2% to 29.9%. Do we need an even bigger push with PMGSY investments?
2. While the total number of unconnected habitations fell by about 8 percentage points, those with population less than 500, at nearly 40%, hardly moved. This is understandable given the fact that scarce resources means that political priorities would always favor connecting the larger habitations (and rightly so, more so since these locations are more likely to be closer to some existing road network and therefore connecting them would be cheaper). But this also means that the remotest and most backward habitations, especially those in the tribal areas, are likely to remain the least priority areas and amongst the last to be connected.
3. Apart from the fact that the smaller habitations are more likely to be the farthest and therefore the most costliest to connect, there is the political dynamics to the PMGSY sanctions. Typically, a district would get Rs 30-50 Cr under the scheme every year, and the political dynamics means that there would be pressure to cover as many constituencies as possible. This also means that the cheapest to connect habitations (which are more likely to be the larger ones) get preferred. Their higher estimates would put the farther habitations at a disadvantage in the competition for attracting sanctions.
4. The quality of a major portion of these roads are doubtful. This means that a considerable share of the roads contructed in the first half of the decade are now not motorable. In other words, the additions conceal the fact that a number of them are becoming un-motarable with each passing year.
5. The concept of connectivity is dynamic, sice with time roads develop pot-holes and require wholesale re-laying. It is certain that the connecting roads for a significant share of the 70% or so connected habitations are likely to have fallen into such a state of dis-repair as to be reclassifed as unconnected!
6. Further, in the absence of any maintenance contract, there is no workable mechanism available to ensure continuous operability of these roads. Given the resource constraints faced by state road transport departments, it is inconceivable that they can be relied upon to institutionally maintain these roads. An approach that accounts for the life-cycle costs of these investments would be more suitable than the standard lay-it-and-forget-it approach.
In this context, an Indicus Analytics feature in the Business Standard quantifies that a rupee invested in rural roads has the potential to generate more than Rs 5 in returns, and that too just from agricultural production. While, the five-fold multiplier estimate will certainly generate dispute, it cannot be denied that the impact is substantial.
The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in 2000, with the specific objective of connecting the 330,000 estimated habitations (out of 825,000) with all-weather connecting roads, and to be financed from a dedicated fund built-up from levy of a special-cess on high-speed diesel. A decade later, 30% of the habitations remain unconnected, thanks to problems with difficult terrain, seasonal limitations on work schedules, need for statutory clearances from the forest department, limitations of qualified manpower and contractors, and nonavailability of dedicated personnel with streamlined institutional arrangements.
Here are a few observations on the issue of rural roads in India, excluding the much-discussed construction bottle-necks.
1. Despite the one full decade of PMGSY, the percentage of unconnected habitations decreased only slightly from 37.2% to 29.9%. Do we need an even bigger push with PMGSY investments?
2. While the total number of unconnected habitations fell by about 8 percentage points, those with population less than 500, at nearly 40%, hardly moved. This is understandable given the fact that scarce resources means that political priorities would always favor connecting the larger habitations (and rightly so, more so since these locations are more likely to be closer to some existing road network and therefore connecting them would be cheaper). But this also means that the remotest and most backward habitations, especially those in the tribal areas, are likely to remain the least priority areas and amongst the last to be connected.
3. Apart from the fact that the smaller habitations are more likely to be the farthest and therefore the most costliest to connect, there is the political dynamics to the PMGSY sanctions. Typically, a district would get Rs 30-50 Cr under the scheme every year, and the political dynamics means that there would be pressure to cover as many constituencies as possible. This also means that the cheapest to connect habitations (which are more likely to be the larger ones) get preferred. Their higher estimates would put the farther habitations at a disadvantage in the competition for attracting sanctions.
4. The quality of a major portion of these roads are doubtful. This means that a considerable share of the roads contructed in the first half of the decade are now not motorable. In other words, the additions conceal the fact that a number of them are becoming un-motarable with each passing year.
5. The concept of connectivity is dynamic, sice with time roads develop pot-holes and require wholesale re-laying. It is certain that the connecting roads for a significant share of the 70% or so connected habitations are likely to have fallen into such a state of dis-repair as to be reclassifed as unconnected!
6. Further, in the absence of any maintenance contract, there is no workable mechanism available to ensure continuous operability of these roads. Given the resource constraints faced by state road transport departments, it is inconceivable that they can be relied upon to institutionally maintain these roads. An approach that accounts for the life-cycle costs of these investments would be more suitable than the standard lay-it-and-forget-it approach.
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