📰 Saudi Arabia promises to meet India’s oil needs
Strengthening relations with Delhi is a strategic priority for Riyadh, says Saudi Energy Minister Khalid al-Falih.
•Saudi Arabia stands committed to meeting all of India’s energy needs, especially in oil, its Energy Minister Khalid A. al-Falih said on Monday.
•Speaking at the India Energy Forum, he said this meant an increase in investment in India as well.
•Mr. al-Falih said Saudi Aramco’s investment of $44 billion in the Ratnagiri refinery was “just the start” and that the company was keen to invest in an integrated downstream business, including on the retail side, as well as in storage capacity.
‘India a priority’
•“Earlier today, I held a meeting with Prime Minister Narendra Modi and Petroleum Minister Dharmendra Pradhan and assured them of our full and continuing commitment to meet India’s energy demands, especially in oil, and to invest in India,” Mr. al-Falih said. “To strengthen relations with India is a strategic priority of the Kingdom of Saudi Arabia.”
•“Saudi Aramco’s $44 billion investment in the Ratnagiri refinery is just a start,” Mr. al-Falih said. “The company desires to build an integrated downstream business, invest in the retail side, and also in storage.”
•Mr. al-Falih said the ongoing belief that the rise of electric vehicles would mean the decline of oil missed the reality of the situation.
•Conventional vehicles, he said, still represented 99.8% of all vehicles in the world, and that electric vehicles are in the passenger vehicle segment, which accounts for only a quarter of oil demand.
•“The majority of oil demand comes from sectors like heavy vehicles and commercial vehicles, and this demand will remain for a long time to come,” the Saudi Minister added.
•“The oil price pain being currently felt would have been much worse if we had believed people who 4-5 years ago said that oil demand had peaked and would decline,” Mr. al-Falih added. “But Saudi Arabia pro-actively and responsibly invested to strengthen our spare capacity and so averted a major price shock.”
📰 Decoding the Rafale controversy
The opacity in the Rafale deal only raises doubts, with its fallout on national security and the ‘Make in India’ programme.
•The controversy over Prime Minister Narendra Modi’s decision to go in for an outright purchase of 36 Rafale fighter jet aircraft, after scrapping the old negotiations, is unlikely to die down. The Congress party has yet to find a smoking gun and hopes that a joint parliamentary committee probe might reveal it. The government has meanwhile tied itself up in knots by making opaque, and often, contradictory statements, in turn raising more doubts and questions.
From 126 to 36
•There are three questions that the government needs to address to neutralise the snowballing controversy. The first is the rationale for the announcement made by Mr. Modi, during his official visit to France, in April 2015, that India would buy 36 Rafale aircraft in a government-to-government deal, thereby scrapping ongoing negotiations with Dassault Aviation for 126 aircraft.
•The process for acquisition of 126 aircraft to replace a part of the aging fleet in the Indian Air Force (IAF) had begun in 2000. After prolonged deliberations, a Request for Information was issued and based on the responses, technical specifications drawn up and a global tender issued in 2007 for 126 aircraft, with 18 to be delivered in flyaway condition and 108 to be assembled by Hindustan Aeronautics Limited (HAL) with gradually increasing domestic content. Six bids were received and technical evaluations over four years led to the short-listing of two — the Eurofighter Typhoon and the Rafale. Evaluation of financial bids in 2011 led to the Rafale’s selection and negotiations commenced with Dassault in 2012.
•The Indian Air Force strength had reduced to around 32 squadrons against its authorised level of 42. Instead of fast tracking the negotiations, former Union Defence Minister A.K. Antony was indecisive, thereby prolonging the process. Negotiations were carried forward by the Modi government and in the run-up to Mr. Modi’s visit, official statements indicated that negotiations were in final stages. Inexplicably, these were jettisoned. Then Defence Minister Manohar Parrikar acknowledged that he was unaware of the decision. The decision for 36 aircraft was only formalised by the Defence Acquisition Council and the Cabinet Committee on Security after the visit and the formal cancellation of the negotiations for 126 aircraft announced in the middle of 2015, generating speculation about the Paris announcement. Last week, a bench of the Supreme Court, headed by the Chief Justice of India, Ranjan Gogoi, sought details of the ‘decision making process’ before the next hearing on October 31.
•The aircraft are to be delivered between 2019 and 2022. Meanwhile, the government invited Expressions of Interest in April 2018 for 110 fighter aircraft, 17 in flyaway condition and the balance to be assembled in India, but assembly was not restricted to HAL. It has since received responses from the same six manufacturers. This makes it clear that the shortfall will not be made up by the indigenous Tejas aircraft which is suffering from delays and cost over-runs (HAL has raised the cost of Tejas Mark I from ₹135 crore in 2006 to ₹268 crore and Tejas Mark IA, in design stage, is quoted at ₹463 crore).
•The second question relates to pricing. Since the earlier negotiations for 126 aircraft were never concluded, a straightforward comparison is not feasible. Earlier negotiations did not cover weapon systems or the performance guarantees and spares. However, since the Modi government boasted that it had negotiated a better deal and promised to provide details, it has now been hoisted with its own petard. It proudly announced that it had obtained a 50% offset undertaking which would give a boost (nearly ₹30,000 crore) to the ‘Make in India’ programme in the defence sector. Perhaps, it failed to realise that the higher offset would be factored into the aircraft price, driving it higher.
Number crunching
•From the sketchy details provided, it would appear that the total outlay is €7.87 billion (₹59,000 crore at 1 euro to ₹73.88). This includes cost of weaponry (€710 million) and a performance guarantee of 75% (current performance level of the Sukhoi-30 fighter assembled by HAL is 50%) with spares (€2.16 billion). This brings the cost of the 36 aircraft, with the India-specific enhancements to €5 billion (₹36,900 crore or ₹1,025 crore per aircraft). However, Union Minister of State for Defence, Subhash Bhamre has put the cost at ₹670 crore per aircraft. Of course, the Congress claims that it was negotiating on the basis of a price per aircraft of ₹526 crore but omits to mention what this related to or the exchange rate.
•The government has taken refuge behind the 2008 Agreement with France regarding Exchange and Reciprocal Protection of Classified or Protected Information, which it renewed in March 2018. This is unconvincing as the French President Emmanuel Macron has publicly declared that the French government has no objection to the Indian government sharing pricing details with Parliament. Therefore, the government’s obfuscation regarding pricing only generates doubts.
Offsets and coincidences
•The third question relates to the offset share given to Dassault Reliance Aerospace Ltd, or DRAL (a 51:49 joint venture between Reliance Aerostructure Ltd and the Dassault Group). The Congress has cited ₹30,000 crore while the Dassault Chairman, Eric Trappier, has stated that the figure is 10% of it as it has signed offset partnerships with more than 30 other Indian partners and the choice of Indian partners was its independent decision. This is inconsistent with former French President François Hollande’s statement to a French news website, Mediapart, in September that Reliance was proposed by the Indian government and that the French did not have a choice in the matter.
•Adding to this is a set of timing coincidences. Reliance Defence Ltd was registered in March 2015, weeks before Mr. Modi’s visit to France. Reliance Aerostructure was registered on April 24. The offset guidelines were amended in August 2015, weeks after scrapping the negotiations for 126 aircraft, relaxing the obligation on the foreign vendor to provide technical details about the Indian offset partner at the time of winning the contract by postponing it to when the offset credits are claimed or a year before it is due. This has permitted the government to feign ignorance about DRAL’s offset share.
•The agreement for 36 aircraft was signed by the two Defence Ministers on September 23, 2016. DRAL was registered on October 3 while FDI in defence had been liberalised to permit 49% through the automatic route in June of the same year. In October 2017, the foundation stone of the DRAL facility was laid in Nagpur in the presence of Maharashtra Chief Minister Devendra Fadnavis and Union Minister Nitin Gadkari. Conflicting statements have been made about whether DRAL would produce components for the Rafale or for Dassault’s business jets.
•Further, while total offsets amount to ₹30,000 crore, this is shared between: Dassault which provides the airframe and is the systems integrator; Safran, which provides the engine and the landing gear, and Thales, which delivers the radars and the avionics. Since Reliance subsidiaries were awarded a clutch of defence licences during 2016-17, it is unclear as to how many of these are engaged with the Rafale offsets. Mr. Hollande’s statement, which is coupled with the set of seemingly fortuitous coincidences, only adds to the controversy.
•The casualty is national security because the IAF’s squadron strength will drop to 23 in 2032, unless there is fresh acquisition beyond the 36 Rafale and 123 Tejas fighter aircraft. The second casualty is the much-touted ‘Make in India’ defence programme. Sadly, this could have been prevented if only the government had chosen to address the three questions with candour and transparency.
📰 The Bhutan vote
As the country prepares for the second round of elections, change is certain
•The results of Bhutan’s general election will have significant repercussions for South Asia. The first round held in September has already delivered a surprise verdict, with the ousting of the incumbent People’s Democratic Party. The two parties left in the fray represent opposites in terms of their experience. The Druk Nyamrup Tshogpa, that won the maximum number of votes in the first round this year, is a political neophyte. The Druk Phuensum Tshogpa, on the other hand, won the first Bhutanese elections in 2008, and the first round of the election in 2013 before losing to the PDP. It maintains a strong traditional base. The first round of the results also threw up some glaring trends. While the ordinary voter who queued up to vote at the polling booths favoured the PDP, ultimately the postal ballots, used by government officials and their families as well as military personnel, swung the vote in the other direction. Another outcome, which may be disquieting for whichever party comes to power, is that votes in the first round of elections were polarised between more prosperous Western Bhutan and less developed Eastern Bhutan. The DPT, for example, won all but one constituency in the east, while winning only two in the west; the DNT and PDP won seats only in the western half. The vertical split doesn’t just denote a development divide, it points to a feeling of discontent in a country generally known as a whole for its Gross National Happiness quotient.
•Regardless of which party wins on Thursday, India-Bhutan ties are expected to be accorded their customary priority by New Delhi and Thimphu, given that Bhutan’s monarch, Jigme Khesar Namgyel Wangchuck, retains a considerable influence over the nation’s foreign policy. Along with his father, and predecessor as king, he has consistently stressed his commitment to the bilateral relationship. However, India must note that while the DNT has made “narrowing the gap” its motto, the DPT, which lost elections in 2013 after India suddenly pulled fuel subsidies for Bhutan, has campaigned on the slogan of “sovereignty and self-sufficiency”. The ‘China factor’ will be closely watched for its impact, a year after the India-China standoff on the Bhutanese Doklam plateau. This year marks the 50th anniversary of formal relations between India and Bhutan, built on cultural ties, mutual strategic interests, and India’s role in building roads and assisting in hydropower projects that became the mainstay of the Bhutanese economy. It is expected that Prime Minister Narendra Modi will lose no time in visiting Bhutan to consolidate the relationship once the new Prime Minister is in the saddle.
📰 Hamstringing the RTI Act
Instead of holding a public debate on making the Act more effective, the government is seeking to dilute its provisions
•The Right to Information (RTI) Act, operationalised in October 2005, was seen as a powerful tool for citizen empowerment. It showed an early promise by exposing wrongdoings at high places, such as in the organisation of the Commonwealth Games, and the allocation of 2G spectrum and coal blocks. However, it now faces multiple challenges.
•The Act, path-breaking in many respects, did not give adequate authority to the Information Commissions to enforce their decisions. Besides awarding compensation to an applicant for any loss suffered, the commissions can direct public authorities to take the steps necessary to comply with the Act, but are helpless if such directions are ignored.
•True, if an officer fails to fulfil his duty, the commission can either impose a maximum penalty of ₹25,000 or recommend disciplinary action against him. However, this deterrent works only when the piece of information lies at the lower levels; it is ineffective in many cases where information relates to higher levels of government. Implementation of decisions taken by the commissions, therefore, remains a weak link.
Proposed amendments
•The recently proposed amendments to the Act would, instead of strengthening the hands of commissions, weaken them. The government proposes to do away with the equivalence of the Central Information Commissioners with the Election Commissioners on the ground that the two have different mandates. The underlying assumption that transparency is less important for a democracy than holding of free and fair elections is preposterous.
•The government also proposes to replace the existing fixed five-year tenure of the Information Commissioners with a tenure as may be prescribed by it. This would make the tenure a largesse to be bestowed by the government. This would be detrimental to the independence and authority of the Information Commissions.
•The Act struck a balance between privacy and transparency by barring the disclosure of personal information if it has no relationship to any public activity or would cause unwarranted invasion of privacy. However, the Justice Srikrishna Committee has proposed an amendment that would broaden the definition of ‘harm’, restricting disclosure of personal information even where it may be clearly linked to some public activity.
•The Central and State Information Commissions have been functioning with less than their prescribed maximum strength of eleven because governments have dragged their feet on appointing commissioners. For instance, the Central Information Commission (CIC), currently having seven members, will have only three by the end of the year if no appointments are made. This leads to delay in disposal of cases, which is compounded by the backlog in the High Courts, where a number of decisions of the commission are challenged. This happens invariably in cases concerning the high and the mighty. For example, the CIC’s decision in 2007 to cover Indraprastha Gas Ltd. under the Act was stayed by the Delhi High Court, and the stay continues to operate.
Clogging of the system
•The clogging of the RTI system is also because a number of applicants, usually disgruntled employees of public institutions, ask frivolous queries. Their applications have unfortunately continued to exist alongside those of numerous RTI activists who have done commendable work, often risking their life and limb.
•Further, Section 4 of the RTI Act requires suo motu disclosure of a lot of information by each public authority. However, such disclosures have remained less than satisfactory. Thus, the CIC has had to repeatedly direct regulators of the banking sector to disclose information on the wrongdoings of banks, so as to enable the public to make informed choices about their dealings with various banks.
•In one case, the CIC had to direct the disclosure of the list of private persons who travelled with the Prime Minister, at government expense, during his foreign visits. Such information should have been disclosed suo motu by the government.
•The RTI Act continues to render yeoman service in providing information to citizens. Though its aim is not to create a grievance redressal mechanism, the notices from Information Commissions often spur the public authorities to redress grievances.
•Thirteen years of the Act’s functioning have given us enough experience to hold a public debate on making it more effective. However, if the issues listed above are not addressed, this sunshine law will lose its promise, particularly in terms of ensuring transparency at higher levels of governance.
📰 India, France in talks to conduct tri-service exercise
During Sitharaman’s Paris visit, ways to operationalise logistics pact discussed
•India and France are in discussions for a bilateral tri-service military exercise to take forward the strategic cooperation while also exploring ways to operationalise the logistics agreement. These issues were discussed during the visit of Defence Minister Nirmala Sitharaman to Paris last week.
•“We have agreed on a bilateral tri-service exercise with France. The modalities are being worked out and it is likely to be held next year,” an official source said on Monday.
•This will be India’s third such joint exercise. The first joint tri-service exercise was held with Russia in October last year and has finalised one with the U.S. to be held next year.
•India and France currently hold bilateral exercises between individual services — Shakti, Varuna and Garuda respectively for the Army, Navy and Air Force.
•India and France signed a logistics pact in March this year which gives access to their militaries to each other’s bases for logistics support. While the agreement gives India access to French military bases all over the world on a “reciprocal basis,” of particular interest for New Delhi are the three French bases in the Indian Ocean — Reunion Island, Djibouti and Abu Dhabi.
Taking it forward
•Ms. Sitharaman and her French counterpart Florence Parly discussed “how to operationalise it and make it happen.” “While the agreement has been signed, we now have to identify specific aspects to implement it,” the source added.
•These three bases would give the Indian Navy and the Air Force operational turnaround to the far end of the Indian Ocean, improving its monitoring and surveillance of the region, in the backdrop of increased Chinese presence in the Indian Ocean Region (IOR).
📰 Not just liquidity: on NBFCs crisis
Policymakers must address the structural problems behind the NBFCs crisis
•The default of Infrastructure Leasing & Financial Services (IL&FS) on several of its debt obligations over the last couple of months has raised serious questions about how regulators missed the growing debt pile of a systemically important financial institution. But apart from the obvious failure of regulators to do their jobs, the IL&FS saga has also exposed the underlying weaknesses in the non-banking financial company (NBFC) sector as a whole which has depended heavily on low-cost, short-term debt financing to sustain its shaky business model. As both international and domestic interest rates continue to rise, the stocks of NBFCs have been punished as investors expect the profit margins of these companies to come under pressure as their borrowing costs rise. Then there is the further, and more serious, risk of NBFCs being unable to roll over their short-term debt in case of a severe credit crunch in the aftermath of the IL&FS saga. Both these factors have combined to put an end to the dream run of NBFCs, which have enjoyed high valuations amidst rapidly growing profits over the last few years. The precipitous crash of shares of Dewan Housing Finance Ltd. has been the defining moment of the present crisis. It is worth noting that the rise of NBFCs was fuelled primarily by the demise of traditional banks which have been unable to lend as they were bogged down by non-performing loans. Meanwhile, NBFCs with strong pricing power, which can somehow successfully achieve the transfer of higher borrowing rates to their own borrowers, may still survive rising interest rates.
•The response of policymakers to the ongoing crisis, which seems warranted if its purpose is to prevent a wider systemic crisis, is fraught with other risks. The Reserve Bank of India, the National Housing Bank and the State Bank of India last week decided to increase the supply of liquidity in the market to keep interest rates under control. The RBI has also urged NBFCs to make use of equity rather than debt to finance their operations. This is apart from the government’s decision to replace IL&FS’s management and commitment to providing the company with sufficient liquidity. While offering easy money may be a welcome measure in the midst of the ongoing liquidity crisis, the prolonged supply of low-cost funds to the NBFC sector also creates the risk of building an unsustainable bubble in various sectors of the economy. Defaults associated with any such bubbles will eventually only affect the loan books of lenders. State bailouts could also fuel the problem of moral hazard as other financial institutions may expect a similar lifeline in the future. Policymakers should thus try to focus on taking steps to address structural problems that contributed to the crisis. This includes steps necessary to widen the borrower base of NBFCs which have been banned from accepting deposits. This would allow NBFCs to tap into more reliable sources of funding and avoid similar liquidity crises in the future.
📰 Castles in the air
Economic ideas such as ‘Charter Cities’ need to be challenged for their implausible premise and iniquitous framework
•The Nobel Memorial Prize in Economic Sciences awarded jointly to William D. Nordhaus and Paul M. Romer for their respective contributions in integrating climate change and technological innovation into macroeconomic analysis is interesting. Both laureates designed methods for addressing questions related to creating conditions for “long-term sustained and sustainable economic growth”. While Mr. Nordhaus is credited for creating a quantitative assessment model that analyses the relationship between economy and climate, in Mr. Romer’s case, it is for his pioneering work on “endogenous growth theory” that highlights how knowledge and ideas drive economic growth.
•Mr. Romer, who was till recently the chief economist of the World Bank, has gone beyond the realm of theory and become a man of action in attempting to implement some of his economic ideas on the ground. Building on his theoretic work on economic growth, he has been championing the creation of “Charter Cities” — new cities with distinct rules that foster innovation and economic growth. These are characterised as “start-up cities” that experiment with reforms by breaking out of the existing state system. Since the nation-state is too big a unit to try out new rules, Mr. Romer proposes built-from-scratch cities as the ideal site at which new rules and institutions are introduced to attract investors and residents.
Colonialism 2.0?
•The idea of “Charter Cities” should be of interest to developing countries such as India grappling with strategies for rapid urbanisation. Mr. Romer has been proselytising leaders from developing nations to create “Charter Cities” by setting apart tracts of uninhabited land for this civic experiment. The host country is required to enact a founding legislation or a charter that lays down the framework of rules that will operate in the new city. A developing country can host the “Charter City” in its territory by “delegating” some of the responsibilities of administration to a developed country.
•Predictably, Mr. Romer has come under immense criticism for promoting what seems to be a thinly disguised version of neo-colonialism. Poorer countries are urged to make a Faustian bargain: relinquish sovereignty over certain territories ostensibly in exchange for economic growth. But he justifies his grand plan by arguing that unlike colonialism, which was coercive, “Charter Cities” offer choice: people have the freedom to decide to move into it. Based on their preferences, individuals can “vote with their feet”. However, they do not have the right to vote to decide how the city is run. Hence, “Charter Cities” go against the basic principles of democracy and citizenship.
•The presence of foreign governments in administering “Charter Cities” is not just incidental but intrinsic to this grand scheme. In a TED talk, in 2009, Mr. Romer remarked that British colonial rule in Hong Kong “did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century”. Hong Kong is relevant also because it was Deng Xiaoping’s inspiration for creating a set of special economic zones in China in the 1980s. However, Mr. Romer has been less successful in evangelising world leaders to adopt his idea. His first attempt to introduce “Charter Cities” in Madagascar in 2008 collapsed when the President who favoured the idea was greeted by violent protests and finally removed in a coup. The next attempt, in the Honduras, also failed as the Supreme Court there, in 2012, declared the creation of “Charter Cities” to be unconstitutional.
Indian experiments
•Given its neo-colonial trappings and poor track record, “Charter Cities”, as an idea, should have been fundamentally unattractive for a country such as India. Nevertheless, an editorial in a leading Indian business daily urged the Narendra Modi government to take the idea seriously and drew parallels with the Presidency Towns of British India. Commentators have also suggested that emerging economies (India and China) can create and govern new cities on their own. The model of a built-from-scratch city often cited in this regard is the Songdo International Business District in South Korea. However, this eco-friendly “smart city” with the best of hi-tech amenities is threatening to be an underpopulated, lifeless ghost town.
•India’s experience in creating new cities with parallel rules and governance systems has also been fraught with conflicts. Lavasa, a city near Pune which was developed by a private company, has been caught up in environmental disputes for many years. The Dholera Special Investment Region and Gujarat International Finance Tec-City, which were initiated by Mr. Modi when he was Gujarat Chief Minister, have not really taken off. The various investment regions housed within the Delhi-Mumbai Industrial Corridor have also made slow progress. The initial idea of creating 100 new cities as “smart cities” has been reformulated as a programme for redeveloping merely a small portion of existing cities.
•Initiatives such as “Charter Cities” seek to supersede the politico-economic institutions in the global south by building cities on a tabula rasa — a clean slate. The guiding logic is that creating built-from-scratch cities with parallel rules and institutions can drive economic growth. What is most alarming about such thinking is the assumption that it is possible to create sanitised technocratic cities uncontaminated by politics. It ignores the pre-existence of multiple social and political claims over space in these supposed clean slates. Despite the failure of many such new cities and private governance regimes, the allure of creating grand castles in the air refuses to die down. Such initiatives need to be challenged for both their ignorant and implausible premise as well as their iniquitous normative framework.
📰 Falling short on most counts
Insurance-based schemes like Ayushman Bharat are no substitute for public provisioning of health
•Prime Minister Narendra Modi’s signature Ayushman Bharat programme, rolled out in September, has been touted by most in the mainstream media as nothing short of ‘revolutionary’, with some even calling it the ‘biggest health care programme in the world’. Is there truth in this claim?
•How does ‘Modicare’ square with, say Obamacare, ostensibly the inspiration behind the scheme? To put the question in a broader perspective, is insurance better than universal public health care? Let’s compare ‘Modicare’ with Obamacare. As against a coverage of roughly two crore adults (aged 18–64) under the latter, the former proposes to cover 10 crore families. So, from the look of it, Modicare indeed is a grand scheme.
Comparison with Obamacare
•But, as they say, the proof of the pudding is in the eating. For Obamacare, the U.S. budgetary provision through an excise tax was $16.3 billion in the fiscal year 2015 (₹97,800 crore if we convert it at a conservative exchange rate of ₹60 to one dollar). Accounting for the difference in medical costs between the two countries — in the U.S., it costs 200 times more — Obamacare’s budget is ₹489 crore.
•The grandness in Modicare is due to its scale as it aims to cover nearly 25 times as many beneficiaries. This means an expenditure of approximately ₹12,225 crore, more than six times the current allocation of ₹2,000 crore made in the current budget! And this is a conservative estimate because we have (a) taken an upper limit of the difference in medical costs; and (b) assumed the likelihood of illness of poor in both the countries to be the same. So, even with this ballpark estimate, Modicare is not even close to Obamacare.
•Moving beyond a hypothetical international comparison, if we look more concretely at Rashtriya Swastha Bima Yojana (RSBY), an existing domestic medical insurance scheme, the actual expenditure for Financial Year 2017-18 was only ₹470.52 crores, as opposed to the budgeted ₹1,000 crore. It covered around 3.63 crore families up to a maximum expenditure of ₹30,000 in health-care costs. The corresponding targets for Modicare are 10 crore families and a maximum coverage of ₹5 lakh. Since the coverage rises by about three times (10 crore/3.63 crore), and assuming that premium amount rises by half to account for the increase in the amount covered, Modicare would require an allocation of more than ₹26,000 crore, 13 times as high as the current allocation. The usual insurance logic tells us that an increase of the coverage limit doesn't obviously lead to a proportionate increase in the insurance premium. So, we make a safe assumption that the premium increases by only half as much.
•Let’s now turn to a more fundamental question: is an insurance-based health-care system better than public provisioning of health? A central argument in favour of insurance-based system is that it is more efficient in terms of delivery and coverage with less financial burden on the government. Let us look at the implications of this.
•First, it is a well-established fact that out-of-pocket medical expenditure rises with a fall in expenditure on public provisioning. In India, where just 1% of GDP is allocated for public health, 65% of the health expenditure is out-of-pocket. In Sri Lanka, where the spending slightly higher at 1.59% of GDP, the expenditure is 38%. In Thailand, where 2.89% of the GDP is marked for health care, only 12% of health spending is out-of-pocket.
•Will the insurance scheme change the picture for India, considering that it will entail a further withdrawal of public provisioning in health? The experience of RSBY shows evidence to the contrary — there has been an increase in hospitalisation in private hospitals and, as a result, the expenditure not covered under the scheme has risen. Moreover, most insurance schemes do not cover out-patient visit costs, which are significantly higher for chronic illnesses. If there is public provisioning of such services, the burden of spending would not have fallen on the patients.
Inbuilt inflationary bias
•Further, insurance-based government schemes have an inbuilt inflationary bias. For one, they induce more hospitalisation, which, without a commensurate increase in supply, increases the price of health care, which further increases the insurance premium, and, hence the burden on the government. This rise could be controlled by a simultaneous increase in public medical services but going by the current commitments of the government, the funding allocated is a minuscule ₹80,000 per health centre.
•Two, insurance companies can cross-finance the losses arising out of private coverage through these guaranteed lump-sum premium commitments from the government, leading to an increased pressure on the exchequer.
•Third, the insurance industry, like any other private enterprise, is driven by profits. Participating in these government-mandated schemes can only be profitable for companies if the disbursements made by them are less than the premium they receive. In effect, the premium payment by the government will set an upper limit to public health-care expenditure. There would hence be a gradual withdrawal of the state from health provisioning because of the pressure from both the private health-care providers and the medical insurance companies. The government would thereby, lose control over setting the costs.
•What is the solution then? Experience tells us that there is no short-cut to universal health coverage. Countries like Thailand and Mexico have achieved it through significant provisioning to public health infrastructure. In Thailand, all sub-districts have health centres, serving 3,000-5,000 people, and all districts have a district hospital, serving 30,000-50,000 people.
•To conclude, the Ayushman Bharat scheme fails to deliver on the promise it makes to the more than 50 crore Indians not having any health coverage. With mounting medical costs and an insurance coverage that is ephemeral, these citizens will be left high and dry. One or two success stories here and there won’t take away from the gross inadequacies of the scheme.
