Sunday, November 30, 2008

Changing rules of dharma

Speaking of the global financial crisis, Sonia Gandhi recently applauded Indira Gandhi’s bank nationalization of 1969, saying that it had given India ‘stability and resilience’. Like the Bourbons of France our political class neither learns nor forgets anything. I don’t think Sonia Gandhi realizes quite what she was saying. India’s bank nationalization delivered neither growth nor equity. Any public sector bank manager will tell you how loans were diverted to friends of politicians rather than to commercially deserving farmers. Bad debts of banks rose alarmingly in the 1980s and moral hazards persist.

Indira Gandhi drew us further away from world trade, raised tariffs and taxes, and made us one of the world’s worst performing economies from 1966 to 1989. Industrial growth plunged to 4% a year vs. 7.7 % in 1951-1965. Manufacturing productivity declined half a per cent a year. Rakesh Mohan estimates that her mistakes cost the nation 1.3 per cent lower GDP per capita per year—meaning that our income would have been more than double today. I don’t blame Nehru for adopting the wrong economic model as socialism was the wisdom of his age; I blame Indira for not reversing course as sensible countries in East and Southeast Asia did. Even China changed in 1978, but we had to wait till 1991. She multiplied by zero and put us back by a generation.

But let’s not dwell on the past. India is in the midst of a dire crisis and we don’t seem to realize how much we are hurting. Panic has choked credit worldwide. Our economy is slowing pitifully. Exports are collapsing. Banks have stopped lending. Construction has come to a halt. Fear has taken over, and people are not buying (except mobile phones). As demand shrinks, so do revenues and profits of companies. Investment has stopped and lakhs in textiles and construction are out of work.

The Mahabharata points out that rules of dharma change in times of crisis when one is forced to observe apad-dharma. Paradoxically, defending capitalism requires state intervention. History teaches that decisive government action can stem the pain. If Lehman had been bailed out the world might not have gone over the cliff. But once normal times return governments must sell off the banks that they had bailed out and not leave them as cash cows for politicians, like our public sector banks.

The quickest way to restore confidence is to further cut interest rates, CRR and SLR, and recapitalize banks. Today’s rates are still too high. Since oil and commodity prices have plunged, the risk of inflation has receded. As property prices decline, and as old mortgage terms become available, people will begin to buy the homes they postponed when interest rates rose. When people buy houses, they give jobs to millions. The same goes for other sectors. Consumer spending will raise demand, restore production, and lead to investment. There is a currency risk in this strategy, of course, but the risk of deflation is greater.

Of course, we should spend massively in infrastructure, but the trouble is that even the current programs are not moving. World Bank has threatened to withdraw funding from highway projects. 234 out of 515 Central projects are delayed. Hence, public spending wont work when speed is of the essence. The saving grace is that we have been accidentally ‘pump priming’ via the rural employment guarantee scheme and loan waivers. What we must not do is to close borders no matter how much local industry clamours for protection. In the 1930s every country tried to protect its own industry. World trade declined 60% between 1929 and 1932 and this caused a worldwide depression. We must do everything to protect the fruits of globalization which has lifted millions out of absolute poverty over the past 20 years. No one can predict when the present crisis will be over. Things could get much worse, meanwhile, but capitalism will eventually correct itself.

Sunday, November 16, 2008

What are you reading these days?

One of my earliest memories is of a visit to a lending library. We lived in Shimla and I had discovered a circulating library near our home. Since my mother would not let me borrow a comic, I picked up my first copy of Enid Blyton. When we got home, my overbearing uncle thundered: “How can you let the boy read this trash!” Blyton may not be Shakespeare but with her I began my love affair with reading. When my kids were of that age they too found a lending library at Kemps Corner in Mumbai. When our family meets nowadays, we don’t ask, ‘how are you feeling?’ We ask, ‘and what are you reading these days?’

Just as a great city must have a big public park along with lots of small neighbourhood parks, so it must have one big public library and many neighbourhood libraries. Ideally, public libraries should be free, paid by taxes, and managed by the municipality. But this is a distant dream in India where the state has failed to deliver even more basic services like schools and hospitals. So, what do Indians do? Well, we don’t sit around. We start lending libraries in the bazaar, which are a metaphor of India’s middle class as it pulls itself up by its bootstraps. When government schools fail we start private schools in the slums; when public health centres fail, we open cheap health clinics.

Generally lending libraries charge ten percent of the book’s price. Since a new paperback costs Rs 200, one can borrow it for Rs 20, which is cheaper than an ice-cream. Chennai boasts the most lending libraries—129—but Eloor, they say, is the best with 80,000 volumes in a digital catalogue. Now thriving in Bangalore, Kolkata, and Delhi, it started in Kerala, the legendary home of the Reading Room movement. Hundred years ago villagers could not afford a newspaper and so they shared it or read it aloud to others. Thus, reading rooms were born. They made people politically aware, and EMS describes how they helped abolish the princely states of Travancore, Cochin and Malabar and united Kerala. By 1947 every village in Kerala had its reading room from which the communists recruited their cadres.

When I was thirteen, I visited America, where I discovered the neighbourhood public library from where I could borrow books for free. I walked in one day, filled out a form, and I was a member. The library had got started through a philanthropic donation of Andrew Carnegie, the ‘robber baron’ who built America’s steel industry. Between 1900 and 1917, Carnegie founded 3000 neighbourhood public libraries, insisting that the local municipality had to guarantee tax support for running and maintaining them.

In India, we do have some grand public libraries—the National Library in Kolkata, the Royal Asiatic in Bombay, and the splendid Connemara in Chennai. But these are more for scholars. Our most inspired library effort in recent years has been Delnet. The brain child of Dr HK Kaul, Delnet has electronically linked 1350 public libraries in India and a member can access 75 lakh books via an inter-library loan within 2-3 days.

But a neighbourhood library has a social purpose as well. Like a tea or a paan shop it brings people together. Delhi Public Library has a few branches but it insists on your identity verified by an MP/MLA/Gazetted Officer before you can borrow a book. My library in America only wanted an envelope bearing my family’s home address—such as a phone bill—as proof. I was treated as a citizen, not as a subject. Despite television and on-line reading, people will continue to read books for pleasure. Perhaps, one day we too will spawn our Carnegie. Or, as we turn into a middle class nation, we will demand publicly funded libraries. Meanwhile, at least, we have our lending library in the bazaar.

Monday, November 10, 2008

Finally, a lifeline for India’s poor November 2, 2008

Nothing causes as much anxiety in a family as when someone falls sick. 65% of India’s poor get into debt and 1% fall below the poverty line each year because of illness, according to NSSO 2004. The answer, of course, is health insurance, but only 6% of India’s workers have it. Free public hospitals are not an option as two out of five doctors are absent, and there is a 50% chance of receiving the wrong treatment, according Jishnu Das and Jeffrey Hammer’s study. This tragic state of affairs is, however, set to change dramatically with Rashtriya Swasthya Bima Yojana (RSBY), a visionary national health insurance scheme, which provides Rs 30,000 ‘in patient’ health benefits at a premium of Rs 600, which the government pays if you are poor.

A brain child of an IAS officer, Anil Swarup, this scheme will succeed when others have failed because of choice, competition and a magical ‘smart card’. A patient can choose from almost 1000 private or government hospitals. States can choose from 18 public or private insurance companies. Insurers have the incentive to recruit the poor as they earn premiums by doing so. Hospitals will not turn away the poor because they don’t want to lose the Rs 30,000 in potential revenue. The poor have a choice to exit a bad hospital, something that only the rich can do today. Competition between hospitals will improve the quality of health care and new hospitals will come up because there is now money in catering to the poor.

The insured carry a smart card with a photo, fingerprints of the family, and an official’s ‘key’ who is accountable. It makes transactions cashless and paperless for the 725 pre-agreed medical procedures. This card contains Rs 30,000 and it tracks expenses day to day in the hospital and the money is deducted automatically after each procedure. No need for pre-approval or reimbursement. Since the poor are migratory birds, the smart card empowers a Bihari to use a hospital in Gujarat. Smart cards are designed to prevent fraud because of 11 unique types of embedded software.

So far 500,000 cards have been issued in six months covering 2.5 million people. Most states have agreed to the scheme because the centre foots 75% of the premia. Haryana and Gujarat are the most enthusiastic. Uttarakhand and Orissa are dragging their feet. Kerala is offering it to everyone as long as the non-poor pay their own premia; thus, it has become a universal product of the insurance company. Only Madhya Pradesh and the North East states, to their disgrace, have not joined. If all goes according to plan 30 crore people or one third of India will be covered in five years at an annual cost of Rs 4500 crores--a tiny sum compared to the money wasted in dozens of other schemes. Previous state health insurance schemes failed because they insisted that people use public hospitals and public insurers—with predictable results. This one will succeed because insurance companies, hospitals, and patients all have ‘skin in the game’.

Smart cards can dramatically cut corruption in all our social programs. India spends 14% of GDP in subsidies for the poor, which is more than enough to wipe out poverty. But poverty persists because subsidies leak out through corruption. Smart cards can also carry data on payments for rations (PDS) or earnings from employment schemes (NREGS) and it can expose corruption very quickly. Despite the Left’s strident rhetoric, middle class Indians do not resent income transfers to the poor as long as the benefits reach the poor. Our problems in India are of the ‘how’ not of the ‘what’. The smart card addresses the ‘how’, and we know its powerful because corrupt officials and politicians are trying hard to kill it. For the nation, it is the best Diwali present amidst all the gloom in the marketplace.

A passion for death or life? October 19, 2008

The persistent attacks of terror on Indian cities by Islamist fundamentalists and on Christians in Orissa by Hindu fundamentalists have spread fear, re-opened old wounds, and polarized us. India’s economic rise is threatened as much by religious fanatics as by the global financial meltdown. This raises an insistent question: Will our 21st century be the story of an India turning middle class or will it get derailed by religious wars?

I have always believed that India would relentlessly march towards a modern, capitalist and democratic future; and terrorist attacks are a noisy, tragic, but ultimately futile sideshow. Islamism and Hindu extremism are a barely disguised form of tyranny, which will eventually lose their appeal. Even fundamentalists will get absorbed in finding good jobs, decent homes, and good schools for their kids. Since the attractions of peace are greater than of war, commerce will replace conquest as the route to achievement. History is on my side. In the past two centuries, the combination of democracy and market capitalism has triumphed over feudalism, monarchy, theocracy, fascism and communism. Europe, the home of religious wars, is now tolerant, and irreligious. There are today 120 genuine democracies versus only 10 a hundred years ago.

Since 9/11, Americans have also been debating the future of capitalist democracy. Many believe that Islam is incompatible with modern democratic values. Samuel Huntington in his book, The Clash of Civilizations, argues that future conflicts will not be between nation states but religious civilisations, and he predicts that Islamism will form an alliance with China to bring down the West. Francis Fukuyama rebuts this in The End of History. After communism’s fall, he predicts most countries will become capitalist democracies and the world will be at peace. But people, he feels, need more than shopping malls to satisfy their thymos--the human need for spirited achievement, which religion and wars fulfilled in the past. This explains the amazing religious revival in America, which Philip Jenkins has documented in The Next Christendom: The Rise of Global Christianity. He describes a new, vigorous, missionary Christianity that is increasingly assertive. The question is whether aggressive conversions by this new Christianity is producing the current backlash from Hindu extremists, who are behaving no better than Islamist terrorists.

For all its seductiveness, I never did buy the ‘clash of civilizations’ theory. Radical Islam or jihadism is political rather than religious. Sayyid Qutb and Osama bin Laden employ dangerous ideas of violence that are not Islamic but resemble anarchist ideologies of Europe. They resonate with Arab and European Muslims because of their deeper alienation with the West. In India, we have reacted to terrorism more maturely than the U.S. Indians are more relaxed than paranoid Americans, and this must dishearten terrorists. Our security agencies have not shown the same competence, however. Our government has also failed to assert the primacy of the citizen over the group, and stop pandering to religious and caste identities. Religion is a double edged sword----while it gives meaning to our confused, uncertain private lives, it also creates an exclusive identity, and this asserts itself publicly before long. In a competitive democracy secular politics does not spring automatically. It took centuries in the West to persuade politicians to eradicate religion from political rhetoric. The Islamic world is still struggling with this problem.

It may seem odd to say this at a moment that capitalism has been humbled, but I still believe that secular, democratic, capitalist India will prevail in the end. Just as we have rejected socialism and central planning as the path to prosperity, so will our plural, secular democracy ultimately defeat political Islam and political Hinduism.