The Growth and Development Imperative

A graph (reproduced below in figure 1) in a recent paper in the Lancet (Bhattacharjee et al., 2024) suggests that India will become the country with the lowest TFR globally as early as 2050 despite the TFR being currently very high in some of the largest states in India (see figure 2).

The forecast published in the Lancet by the Global Burden of Disease team signals that there is no longer a need to pursue population control policies but to explore how, as a country, we will prepare to deal with the inevitable increases in our dependency ratios. Some of the ideas on how we may do this are discussed below.

Do Not Distort Well Functioning Markets – Engage only in Direct Cash Transfers

Welfare economics suggests that when markets work well, allowing them free rein ensures that national resources are used most efficiently. If the results are not considered socially optimal (Myles, 1995), taxing the rich and redistributing the wealth to the poor is the only intervention that welfare-oriented governments must engage in. In addition to these broader reasons, there is a great deal of field-level evidence of the positive impact of direct cash transfers. Project Deep, an organisation that advocates for direct, unconditional cash transfers to individuals (not households), has made it available on its website.

However, this sound advice is often not heeded on the ground. Governments engage extensively in multiple well-functioning markets driven by the need to indirectly support politically powerful constituencies or, as Yergin and Stanislaw ?(Yergin & Stanislaw, 1998) suggest, by a reluctance on the part of the administrators to withdraw from such activities even when it is clear that there are well-functioning markets at work and that the presence of government actors is actively preventing them from functioning optimally. Energy, financial services, almost all infrastructure sectors (India already has the world’s largest network of rural roads), and agriculture are some examples of such sectors. These engagements by the government substantially reduce the resources it has available to address equity and the market failure related concerns discussed below.

Building the political consensus and the strategy for a gradual withdrawal of the government from these sectors needs to be given urgent priority. As a part of this process, investing in training the bureaucracy to transition from administration and management to governance of the economy also becomes essential.

Actively Address Market Failures

There are indeed significant failures in multiple markets where their unfettered functioning does not lead to the most efficient allocations, calling for government interventions well beyond just the transfer of cash to people with low incomes. However, the government needs to be very disciplined here and arrive at a careful statement of the market failure and a deep understanding of the sources of such failures before it launches non-market interventions.

There are several reasons why markets could fail. One source of failure is government or policy-induced distortions and barriers, which can force the economy to achieve inefficient outcomes – Mor and Sehrawat (Mor & Sehrawat, 2015), for example, point to risks introduced by high levels of policy uncertainty. As discussed earlier, the focus of policy should be on actively removing these internal barriers to address this critical source of market failure.

The other important reason is that consumers do not behave in a manner that is best suited to their individual or collective interests. This apparently irrational behaviour could either be because they do not have complete information (for example, of the harms associated with C-sections or the importance of Civic Learning and non-cognitive skills) or despite being fully informed, because of they suffer from behavioural biases which prevent them from acting in their best interests (such as when they do not seek preventive care or prematurely stop taking the medicines that they have been prescribed).

In a recent paper, Rodrik and Stiglitz (Rodrik & Stiglitz, 2024) point to another, more subtle, source of market failure even when all the conditions for the successful operation of the market mechanism are met. They point to the failure of markets, without policy interventions, to endogenously identify the structural transformations in the economy necessary to find the best possible growth pathways. They suggest that markets operate well to optimise within current development paradigms but are unable to move the economy to new ones.

The following paragraphs discuss all these types of failures and the opportunities resulting from correcting them.

Substantially Increase Inter-State Migration

Differentials between state-level per-capita incomes and human development indicators are so high that the labour market’s normal functioning should induce high migration levels between states. However, as Clark and Wolcott (Clark & Wolcott, 2003) point out, Indian inter-state migrations are a mere fraction of those observed in Europe in the early parts of the 20th century, despite the presence of onerous legal barriers.

Perhaps the most important reasons for these slow rates are the nativist “sons of the soil” policies followed by several state governments, in the mistaken belief that this is the best way to ensure that their states’ “original” inhabitants enjoy a high standard of living. Kerala is understood to have one of the best migrant-friendly policies in the country. Perhaps other higher-income states can learn from them and encourage higher levels of migration into their states. Similarly, just as people are learning international languages and preparing themselves in other ways for migration to other countries, can the lower-income states do more to prepare their residents and facilitate their migration to higher-income states -- teach them Gujarati, Marathi, Malayalam, and Tamil perhaps?

Build the Basic Enablers

Ensuring access to comprehensive financial services and that people have the best possible opportunities to be healthy and well-educated would be good starting points for all states. However, as discussed below, several market failures are acting as impediments.

Comprehensive Financial Services

This has long been understood to be an essential policy goal (Mor et al., 2013) but has proved challenging to realise because of regulatory and other impediments. Ananth and Shah (Ananth & Shah, 2012) suggest that in order to maximise financial well-being, every individual and every business needs to be able to plan their existing cashflows through the use of suitable low-risk savings instruments, grow their existing incomes by accessing well-designed credit instruments, protect themselves from shocks through insurance, and diversify their asset profile through suitable investments.

While there are several barriers to achieving this goal, almost all the ones listed below are those well within the power of the government and the regulator to address, and governments interested in maximising the welfare of their residents would do well to take,? among others, the following steps.

1. Reserve Bank of India: Persuade the Reserve Bank of India to make it easier to create new (non-deposit taking) non-bank finance companies (NBFC) and sharply reduce (or even eliminate) capital adequacy requirements imposed on them. Unlike commercial banks, NBFCs are not creators of money, and their failure, unless they get to sizes over Rs. 100,000 crore, is not likely to create a systemic crisis. Banks have high-cost bases and are custodians of large quantums of deposits, and entering high-risk, previously unbanked environments is not necessarily in their interests. NBFCs are well-equipped to take on this role and can become suppliers of well-balanced portfolios, with, where necessary, small first-loss protection (only to align incentives) to banks, insurance companies, and mutual funds. Making this process smooth and low-cost will allow these entities to grow access to credit in most parts of the country.
2. Ministry of Finance: Persuade the Ministry of Finance to require government-owned banks to substantially raise interest rates on savings and current accounts to be close to, if not higher than, the rates at which the government borrows money. In most countries, the difference between these rates ranges between 0.01% to 0.05%. In India, the differentials are closer to 4% (Mor et al., 2006) and represent a massive annual transfer of wealth from low to middle-income depositors and small businesses to the government – a hidden, highly regressive tax comparable to the seigniorage that the poor end up paying. Using the rates set by the public sector banks as benchmarks, the large private banks keep their current account and savings account (CASA) rates low and considerably increase their profits directly due to these distortions in deposit rates – representing a transfer of wealth from the low and middle-income households and businesses to shareholders of these banks.
3. Securities Exchange Board of India: Persuade the Securities Exchange Board of India to make it possible for mutual funds to profitably offer very low-value units to their investors with real-time settlements, thus substantially expanding the opportunities for those with limited savings to invest in money market and index funds. The technology capabilities and costs of mutual funds already allow this – the key impediments are the poor technological capabilities and the high fixed (versus ad valorem) charges being levied by various intermediary agencies that the mutual funds are required to contract with, who have become near-monopolies. The low-value units will allow small savers, if they so choose, to move their savings from low-yielding savings accounts with banks to mutual funds, which invest only in treasury bills issued by the Reserve Bank of India. It will also allow them to access opportunities for national diversification of their investments away from highly correlated and low-yielding local assets.
4. Insurance Regulatory and Development Authority of India: Persuade the Insurance Regulatory and Development Authority to allow a greater entry of insurance companies by lowering the minimum capital requirements at least to developed country norms – the current Indian requirements, at Rs. 100 crore, are six times higher than those required by, say, France (Chatterjee et al., 2020). The regulator also needs to allow the emergence of Managed Care options in which insurance and healthcare are combined into a single offering, thus requiring healthcare providers to focus on keeping their members well instead of simply waiting for them to fall ill. Non-profits like Uplift Mutuals and Annapoorna Pariwar are already doing this at a reasonable scale, but without regulatory support, replicating these ideas and scaling them to national/state-wide levels is not possible.

Universal Health Coverage

?Universal Health Coverage is another one of the goals that has been understood to be a key enabler but has eluded us in India, in all our states. In the more developed ones, the rapidly growing burden of diseases such as diabetes risks overwhelming them with, potentially, an epidemic of amputations, while in the less developed ones, the older challenges of infectious disease and infant and maternal mortality have still not been overcome. The sources of market failure here are primarily external to the government and, as discussed below, unlike in the case of financial services, require the state to get more actively involved in addressing them.

1. ?Money is not the problem: Recent research (Mor & Shukla, 2023) suggests that except for the four states of Bihar, Jharkhand, Madhya Pradesh, and Uttar Pradesh, all the other state governments are either already spending a sufficient amount of money to deliver or will get there over the next few years. For these four states, an annual allocation of, say, Rs. 500 per capita (at 2018 prices) by the Finance Commission from the Consolidated Fund of India would be necessary to ensure that they have sufficient funds.
2. The public sector in healthcare needs greater trust to perform: The reluctance to increase healthcare allocations and the decision to launch schemes designed to use public funds to finance private sector providers suggests a loss of confidence in the ability of the public sector to perform. Experiences of countries such as Thailand and Turkey have shown that when instead of taking the low-trust narrow accountability approaches, which are holdovers from the Stalinist era, local public sector health system managers are given the freedom to operate within global budgets, and the focus shifts to population-level outcomes and away from micromanagement, the public sector is able to deliver effectively on UHC commitments. Many countries have benefitted from the existence of highly competent purchasers, such as the National and State Health Authorities, to implement such high-trust systems effectively.
3. Gaps in hospital availability need to be filled urgently by the public sector:? In over 300 districts of India, as evidenced by the extremely low incidence of C-sections, the availability of referral, emergency, and surgical care is well below minimum requirements – leading directly to increases in death rates. Experiences of rural and relatively low-income states like Andhra Pradesh and under-developed regions such as Vidharba in Maharashtra indicate that the public sector can offer these services effectively in the remotest regions. Evidence also suggests that the mere availability of insurance schemes in these regions does not induce a supply response from the private sector (Dong et al., 2019) and that there is a need to build and adequately staff these hospitals. Tools such as the CARE platform offered by the e-governments foundation (they also offer the DIGIT platform to urban local bodies) and NAVYA Care can allow specialists located in government medical colleges within state capitals to offer collaborative care in government hospitals located in the remotest of districts (10BedICU, 2022a, 2022b).
4. Social determinants of health need urgent attention: No matter how well the healthcare system is built, if, concomitantly, urgent steps are not taken to change the social determinants of health (SDOH), the disease burden could rise to overwhelm it. Outside of healthcare, SDOH emerge from four areas: (i) the built environment, (ii) economic stability, (iii) education, and (iv) social and community context (HP2020, 2013). The following provide examples of interventions that can impact these SDOH in relatively short periods.a. Changes in building codes have a material impact on lower respiratory tract infections (Pardeshi et al., 2020).b. A greater emphasis on sidewalks and public transportation instead of on cars and roads impacts diabetes, road traffic injuries, and respiratory diseases such as asthma.c. Simple school-based games can significantly increase young people’s resilience to mental stress (Kellam et al., 2011).d. Continued funding of programs like the National Rural Employment Guarantee Scheme can positively impact the mental health of both parents and their children (Tsaneva & Balakrishnan, 2019).
5. The private sector can play a top-up role without becoming inflationary: Even when the public sector can deliver effectively on UHC commitments, there will be a significant “top-up” role for the private sector to play in providing, for example, treatments which may not be entirely cost-effective given current government budgets (such as gender confirmation surgeries) or high-end hotelling services. Changes of the type discussed in the insurance section can help ensure that private sector costs are kept in check and their focus shifts from maximising surgeries to keeping their enrolled members healthy.

?High-Quality Primary Education

?While India has made impressive progress in improving access to primary education, with almost every child staying no more than a kilometre from a well-equipped government primary school, cognitive, non-cognitive, and civic learning outcomes have been poor. Private schools focussed on cognitive outcomes have emerged to meet the demand from parents, but most of the apparent gains have been associated with their parents’ higher income and educational status and not with the superior quality of schooling. Unlike in the healthcare sector, where several developed countries with strong regulatory capabilities have successfully implemented UHC entirely within the private sector, the extent of distortions in primary education is so great that all countries (with Georgia being a notable exception) have offered it directly through government schools (Mor & Muthuram, 2009).

At secondary, high school, and college (including post-graduate) levels and skilling for specific professions, the evidence is more mixed on the potential contribution of the private sector because the attention shifts much more closely to cognitive and technical skills and knowledge acquisition, which are far more easily measurable than non-cognitive skills and civic learning outcomes. If there has to be an intervention at the policy level, there would need to be a more explicit articulation of the market failures in these areas.?

?Focus on Rapid and Sustainable Urbanisation

?Despite the clear gains to households from living in an urban area, for several reasons, India has one of the slowest rates of urbanisation worldwide. Moreover, the urban development that is taking place is almost uniformly low quality. Several factors have resulted in this outcome that must be addressed to reverse these trends.

1. Presence of highly distortionary subsidies in rural areas: One of the most important reasons for slow urbanisation is the link between access to government subsidies and direct engagement in agriculture or residence in a rural area. These policies have introduced a high viscosity in the urbanisation process and need to be urgently replaced by direct cash transfers linked to income status (Mor et al., 2013). These subsidies also do much to distort the functioning of agricultural markets and delay farmers’ transition away from the current focus on wheat, rice, and maize.
2. Very low productivity of small farms: Studies that have more recently re-examined the productivity of small farms have found it far lower than that of larger farms (Gollin, 2018). Improved productivity can allow the quantum of land used for agriculture to fall and allow for movement away towards more climate-friendly strategies for cultivating rice, for example. The reduction in land use can make it possible to return an increasing quantum of this land for re-afforestation (Mor, 2023) and the implementation of "ecological countermeasures" thus ameliorating the impact of climate change to some degree and pathogen spillovers. The use of unconditional cash transfers and the more rapid growth of cities, mainly through the conversation of more dense villages, can reduce the impact of these changes on small farms and the landless while improving the power of the cities to absorb them in newer occupations.
3. Poor design of existing cities: For reasons such as poor building codes (Mor, 2021), an excessive emphasis on private vehicular transport, and discrimination against the development of rental housing, existing cities have increasingly become less healthy and less able to accommodate new entrants. The blueprints of the thousands of new cities that will be built in India over the next 50 years need to consider all of these and many other factors right from the start so that we not only enable growth but also ensure good health.
4. Need for explicit urbanisation nudges: Night-lights data (Onda et al., 2019) suggest that the density and size of the population in many Indian villages is already higher than what most countries consider the threshold for it to be referred to as urban. However, almost all of these lack the essential prerequisites, such as mass-rapid transit systems, of what a modern city would have that allows it to grow its economic potential rapidly. A careful strategy that nudges these areas towards more rapid urbanisation by building, say, transportation hubs and doing some careful zoning and land-use planning could result in a transition of these cities from their current slow growth trajectories to much more rapid ones.

Conclusion

It is clear from the most recent projections of TFR (Bhattacharjee et al., 2024) that India’s TFR is decreasing far more rapidly than anticipated. In addition to entirely ceasing all population control efforts, there are several steps Indian state governments could take that could help their residents deal with the inevitable increases in dependency ratios. Making efforts to increase inter-state migration, ensuring the availability of essential services such as access to finance, good healthcare, and high-quality primary education, and accelerating the rates of urbanisation the country is experiencing could be a few.

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