Food Entitlements in India - Self Sufficiency v. PDS Provisions

This is a comment to Prof. Jean Dreze's article on "Poverty estimates vs food entitlements" in the Hindu, dated 24th February 2010 - http://beta.thehindu.com/opinion/lead/article112226.ece?homepage=true. :

Even rough BPL estimates can be excruciatingly hard in the populous and unforgiving Indian terrain. With statistics often cited by smart Indian executives as a pretence of accomplishment, unspoken hard realities must be faced and creative mechanisms be adopted to ensure food security for India's teeming millions.

Firstly, though a universal PDS can be beneficial for the non-antyodaya, extreme poverty suffered by the antyodaya can only be mitigated by a targeted approach. A targeted approach together with NREGA emphasis on watershed development, self-sufficiency, and strong infrastructure to improve market linkages with the urban areas can be much more effective in screening, identifying and resolving malnutrition instances disgracing the nation.

Secondly, accepting the dreadful caste bias in India's poverty structure gives an impetus to adopting more mature policies for the backward castes and thereby alleviating a major chunk of BPL communities - a majority of BPL communities are the so called "lower" castes of India. The current "equality of result" reservation policy deprives the same people incentives for working towards their own betterment. Policies should rather encourage equality of opportunity to ensure sustainable long term empowerment. Though NREGA is a commendable step in this direction, much more could be achieved by using creative methods such as creating livelihoods for backward castes in fruit and grain packaging, processing and marketing within villages; income based affirmative action programs which restrict creamy-layer from additional benefits; improving rural management degrees and giving incentives to university youth to work for rural areas as a part of their degrees.

Much more can be done in India than wait for a universal PDS to come give us food which nevertheless ends up rotting in godowns.

US Economy - An Outlook for the Coming Year

With consumers directly contributing to more than 70% of the total output of app. USD 14.3 TR (2008) and consumer behavior, owing to job market, still largely recessionary, the US economy could undergo a major structural shift and fall in openness as a result of the financial crisis. As obvious by now, the experience has left the government with a tighter market often feared as an infringement of their personal freedom by Americans.

This structural shift is largely a result of unemployment rates which touched a 26yr high this year and a mounting federal debt which stands at more than 10 trillion USD with the numerous stimulus bills pumped by Obama. However, since unemployment lags by more than 2-3 quarters, it does not behove to present the grim picture for the coming year as it did back in June. Consumer behavior is also bound to improve one the stimulus money kicks into the economy - About 60B USD in spending and 43B USD in tax relief has hit the streets so far, accounting for a mere 13 percent of the plan's net planned amount.

While an increased deficit financing could usher in protectionism in terms of reduced services and manufacturing trade with BRIC, such fears are still uncalled for as BRIC goods and services continue to remain cheaper with their comparitive advantage of cheap labor. So while the US government can force businesses to move back to US, it cannot overnight change the restructuring effect such an export of jobs has had on the US economy in the past 7-10yrs. The US government can instead create more R&D jobs through technologically enhanced infrastructure, effecient science and maths education, and the ongoing work on the healthcare reform bill. Investment rates which currently stand at way more than what the economy has saved, would be more matched in near future, and usher in an investment geared for sustainable and environment conscious growth. It also presents a remarkable opportunity for the economy to restructure with a comprehensive financial regulatory framework, with an increased rate of systemic savings as an after-effect. Such changes would set the country on a 2-2.5% growth trend by the end of coming year, with a atleast .8% rise in growth by the end of first quarter.

So hold on as the the country emerges back strong in a new year and the Obamic superhero rehauls healthcare, infrastructure and education to build back the lost country by the end of his term.

Microfinance - A Bittersweet Symphony ?

Over the last weekend, I visited NEED, an NGO (Non-Government Organisation) cum MFI (Micro-Finance Institution) which has an Asoka Fellow Mr. Anil Singh as its CEO. Though an age old concept no doubt, MFI has only recently been organized and rendered profitable by the Grameen Bank (literally, "bank for villagers") leader and Nobel leaurate Mohammad Yunus. It is now seen by not only World Bank, UNO and national governments, but even by corporate banks and private equity funds as sure shot fame for their CSR efforts. Lending to Self Help roups (SHGs) and Joint Liability Groups (JLGs) as opposed to individuals lowers moral hazard because of social retribution, and allows freedom from exorbitant money-lender interest rates which can be anything from 50-100% (and even more) for a month. These micro-loans allow women entrepeneurs start up small businesses like buy a sewing machine, makeshift grocery shops and calling booths, handicraft, basket making, dairy farming etc. Women folk are focussed upon for they have a higher repayment rate, invest the profits back into the business, spend extra profits on family health and child education, and traditionally are unemployed because of cultural restrictions on their working outside the home.

The interaction with such women when on a field trip to Lucknow (NEED headquarters), brought to fore not only high interest rates but also restrictions on borrowers to repay principal amounts by the individual money lenders. For example, for a loan of Rs. 10,000 the money lender would allow the borrower to repay interest of Rs. 1000 every month but would insist on taking back the principal amount in its entirety which would never be possible because of hand to mouth existence of such income stratas and lower saving capability. The result would be piling up of interest and perpetual debt. This is where MFIs come into picture and allow borrowers to repay Rs. 1000 per month for 12 months and set the borrower debt free at the end of this period.

But though MF has been famed as an elixir to end desparate starvation and poverty, even the goody-goody MFIs often end up exploiting this need for cheap credit, often forgetting the most integral social engineering need for such efforts. Loans are given freely in urban slums, creating credit bubbles and indebtedness. Early repayment of loans is not allowed and MFIs group together in urban slums instead of expand into hard to reach rural villages. This encourages borrowers to take one loan for the repayment of another and spend the loan on consumption than on creating new self livelihood mechanisms.

Branding such MFIs as mere businesses, Mr. Singh of NEED calls for a principle of "Equity for Equity" - micro-finance with social justice and creation of livelihoods as its main objective than just a provision of cheap credit. NEED identifies whether an individual is capable of servicing such loans through sustainable start ups and provides consultation for the same for the first 1-2 months. Only then when it feels that the person will engage in a long term livelihood through credit does it agree to give them a loan while allowing early repayment. Further, it establishes market linkages for such individuals, gets patenting for their handicraft techniques, encourages organic farming and free trade products, and most above all, practices social engineering before considering MFI as another profit driven opportunity. This is truly "just-profit" and should be promoted by governments by disbanding such MFIs from NGO or NBFC (Non-Banking Financial Corporation) status which (i) do not allow early repayment of loans, (ii) venture into areas where more than 70% of the locals are already covered, (iii) pump back less than 80% of their profits into new loans, (iv) do not offer consultation for livelihood creation and (v) do not have mechanisms to check the potential of an individual in creating a sustainable business before servicing him a loan.

As a harbinger of a unique model of micro financing, NEED can lead other MFIs in their reorientation towards social empowerment over and above availability of credit. NEED should, besides diversifying its loan products and social engineering efforts to expand its reach, lead forums of MFIs for ushering in such understanding of social empowerment, train new MFIs to go the NEED way than the business MFI way, and liase with the government and SADHAN to brainstorm above mentioned recommendations for effective livelihood creation. Without such a social brainstorming, micro finance would remain no different than cheap yet soul less money-lending.

Credit Crunch, Bailout and India: Where is the hype?

Although predicted by Jim Kramer as early as June 2007 in a vociferous interview to CNBC asking Bernanke to "wake-up!", the US credit crunch continues to harbor uncertainty and dismay. But the fear and the hype are seemingly non existent in India - where the consequences for world food prices can be drastic for the 75% of its 1.15 billion and growing population when 1 billion across the globe were pushed below poverty line by the crisis. Why?

The multifold argument stems from one simple core difference in Indians: mindset. Culturally, Indians are less inclined to spend on credit, forget taking housing loans with as little downpayment as 10% (as was prevalent before the crisis in US). So when the then Indian Governor Mr. Y. V. Reddy stuck to the conservative high regulation attitude and emphasized corporate disclosures, it was a blessing in disguise for Indian banks which are less exposed directly to problem assets. Secondly, even when exports and the stock market faced gloom, India's FDI's inflows were surprisingly as sturdy as ever. How was this possible with the US financials and auto-industry collapsing like a house of cards? Well, the same industries continued their investments in India realizing that with a forecasted 6% growth rate, India was still far better than the recessionary American or European markets. The billion dollar US bailout of GM would go a long way in helping it continue with the proposed billion dolar worth plant proposed in Gurgaon.

Although it is debatable if India has received its due recognition in the world, the crisis will surely open up the country to hoards of new investors looking to tap in to its consumer base and the country ganing new recognition in the G-7 meta-process when the combined GDP of BRIC countries could overtake the combined economic might of G7 as an aftermath of the financial tumble.

Furthermore the most important for India are its 75% of the population living below USD 2.5per day. When inflation fell from the 12.91% in August to 5.2% of January, the poor pocket became half as strained as it would have been without the monetary expansion to counter the crisis. Real India isn't the stock market or the exporters worth billions which experienced shocks, it is the low and medium income families who actually provide the services and manufacturing products to which the elites act as in intermediary in selling it off to the developed world. Thus overall, the crisis has come across as a boon in disguise to the Indian poor, to its banks, and its future recognition as a force to reckon with in the new world order after a financial restructuring.

Privatization of Power: Profiting from Poverty?

This post is motivated by an observation by 'War on Want,' a London based organization which argues that privatization of power and other basic necessities in developing countries is akin to profiting from poverty. The argument lies that 1) World Bank and IMF restrains emergency aid and debt relief to countries unless they privatize their utility services (water, power, gas); 2) privatization often leads to global conglomerates hiking prices for the poorest of the poor to cover investment costs and then juicing the money out of the country.

The concerns are valid albeit their presentation far too biased. Resolutions to these are barely considered with mass strikes against power privatization in Andhra Pradesh and Maharashtra in India highlighted but its effectiveness in Mumbai and Delhi denied any appraisal. Agreeably, the poorest of the poor live far from these metropolitans, but an imposition of 4:1 rule to accommodate power for poor states could be a much better solution than completely negating privatization and multinationals as devils fostering poverty.

Disinvestment is urgent in India where 42% of public power is stolen and unpaid for, if it wants compete against neighbour China which has a commendable 3% loss. Large deficits (73k million units) of power continue to hamper infrastructural improvements in India which will need more than 400,000 MW of electricity (which is more than a whopping 120% of what it currently has) by 2020.

Privatization of major utilities such as water and power is often discouraged as it leads to monopoly access to the country's most needed resources. India, however, is a case of monopolistic competition due to 1) a check on entry deterring strategies by monopolies and 2)already existing tiering of power bodies at the State and National levels. However, War on Want's vehemence towards Globeleq is probably justified in case of India. Entry of foreign firms leads to huge foreign exchange outgo and loss to indigenous industry supplying power equipment. But the case for Indian players Reliance and Tata power still stands credible if the nooks and corners of the 100 million strong country are to be reached.

But these companies need to be incentivized to follow something akin to the 4:1 policy implemented in the case of Social Banking Experiment of the 70s. The banking experiment lead to drastic reduction in poverty and availability of credit as it forced private banks to open 4 banks in unbanked locations before opening 1 in urban areas. A similar yet easier policy could be of supplying power free of cost to 4 villages for every city charged for power. Easily accessible and efficient power to farmers, small village enterprises, rural households, schools and medicine dispensaries would no doubt go a long way in closing the ever widening elite-poor gap.

Islamic Law and its affects on Risk Mitigation through Informal Credit Rationing in Northern Nigeria

"Credit markets in Northern Nigeria: Credit as Insurance in a Rural Economy" by C. Urdy highlights the overcoming of informational assymetry to mitigate adverse selection, and of enforcement problems to lessen the moral hazard problem, by a humble combination of social sanctions and Islamic Law in the predominantly agricultural Northern Nigeria.

"And if the debtor is in difficulty, then [there should be] postponement to a time of ease" (Koran 2:280)....
Under this law, fixed interest rates and fixed repayment periods for loans are prohibited in a loan contract. Thereby, both the borrower and the lender share positive or negative shocks as they come to the respective household or to the entire village community. This is deviant from credit sanctioning where in the event of a negative shock to the borrower, neither the repayment period nor the interest rate gets changed in most of the cases. On the other hand, in Nigeria, a loan is affected if there is a shock not only to the borrower but also to the lender. So if the borrower gets a positive (negative) income shock or the lender gets a negative (positive) one, the interest rate on the loan would be implicitly higher (lower) than normal.

Two basic identities of formal contracts, collaterals and interlinkage of multi-level contracts are thus absent from this Nigerian setting. Such a phenomenon, however, is badly cushioned with outside help in case the entire village is affected by a negative shock. This is because the loans are mostly made to community members closely knit as family or friends, and social sanctions can be easily used by excluding the defaulter from future opportunities to borrow, or reporting to a village authority such as a religious leader or the village head. Expanding the collateral-less loan environment to a larger area is thus harder because of diminishing confidence in a more estranged community, and also because information flows more easily between borrowers and lenders within an extremely small geographic or social space.

The summary of the paper argues that flexibility of these shock-contingent contracts presents exceptional challenge for formal lenders to enter this market. It fails to point out that the Nigerian example could be followed to set up formal flexible "tiered" interest rate systems by state banks in rural areas so that borrowers and lenders can be more linked in the form of a community than a customer acting as profit making mechanisms for the banks. The paper also does not evaluate the benefits in reducing poverty in rural unbanked locations with potentially negligible costs. Borrower-Lender risk sharing, as spurred in Northern Nigeria because of its religious setting, could be followed as an example in potentially many more Moslem areas which could probably be more willing to accept such a system.

The 1977 Indian Social Banking Experiment: why was the poverty reduction mechanism stopped?

Robin Burgess and Rohini Pande's article, "Can rural banks reduce poverty? Evidence from the Indian Social Bnaking Experiment" examines the effect of forced commercial bank branch expansion into rural areas by the Indian Government from 1977 to 1990.

They however fail to comment on:
A) the reasons why policy of opening 4 bank branches in unbanked locations before opening 1 in already banked locations was discontinued in 1990,
B) the cost of such a program on GDP due to almost 40% default rate in such unbanked rural locations, and
C) the opportunity cost of not being able to open as many urban branches and attaining much higher levels of return on desposits and loans.

Notwithstanding these pitfalls, there are still some important economic lessons to be learnt from the paper. Traditionally it has been argued that bank nationalization and increased formalized credit by the government in rural areas could actually exacerbate poverty, because of elitist groups capturing the subsidy in interest rates to loans in that area and thereby the poor becoming poorer because of lesser and lessser credit available. This paper however shows that opening a bank branch in a rural unbanked location per 100,000 persons reduces rural poverty by 4.74%.

After bank nationalization in 1969, the Indian government, in wanting to improve access of formal credit and saving opportunities to the poor, implemented a policy rule which lead to the opening of bank branches in roughly 30,000 unbanked rural locations from 1969 to 1990. This is commendable especially in India where beuracrcay and corruption drastically marr any infrastrucural or financial develoipment. It was however also necessary because banks before this would always open up more and more branches in urban already banked locations because of high savings and demand of loans at high rates.

The paper thus shows that bank expansion reduced poverty noticeably and exponentially in states with low initial financial development while it did not have much of an effect in urban locations. However, the policy was abandoned in 1990 due to more than 40% default rates and more opening of the economy due to liberalization vanguarded by the present Prime Minister, Dr. Manmohan Singh, as the Finance Minister at that time.

The question though still remains, is a "GDP growth shining" India appreciably better off than a more equitable India with lesser extremes of wealth distribution?

Property Rights and Investment: Vague Correlation?

A review of the article "Property Rights and Investment Incentives: Theory and Evidence from Ghana" by Timothy Besley

Evolution of property rights is a cornerstone to development as it encourages long term investment decisions in an economy not just in infrastructure and technology, but more so in a humbler aspect such as that of farming. This is basically due to three reasons as given in the paper:

1. Security: If one is afraid of his/her land being expropriated by the land mafia or the government itself, then there is no use of investing in any factory, farm or even residential property. In Cuba for example, when a oil field was discovered, it hardly attracted any investment because it was feared that as soon as the government smelled the air of heightened profits, it would expropriate the land.

2. Collateral: It is believed that easier it is for a property to be held up as a collateral against a loan, the more investment it will receive. The intuition is that in a competitive land market locale, banks would easily take any property as a collateral to a loan because of high supply of properties. This would mean that the interest rate on the loan would also be low because of high supply of properties and thus, a low interest rate would foster investment into the land - essentially a multiplier effect.

3. Trade: If it is easy for a land to be sold, bought, leased, rented, mortgaged, bequeathed etc, then an investor would invest in the property thinking that if the investment fails, atleast he can easily sell the property to get a part of his investment back.

Besley uses these three approaches to determine the effect of land rights on investment decisions by farmers in two agricultural districts of Ghana: Anloga and Wassa. He also tests the endogenity of rights wherein if higher land rights increase investment, maybe there is a reverse causation as well and thus an increased investment strengthens property rights. This would give an upward bias in the coeffecient of the affect of rights on investment. Furthermore he tests whether farmers themselves make such investments into their lands to increase their land rights.

Since the entire Ghanian region would be affected by the same geo-political and natural disaster occurences, chosing two regions within a same country is more robust than testing across two different countries with different socio-cultural and political climates.

Wassa and Anloga also have different agriculutural priorities with trees grown on privately owned lands in the former and small shallots (a small type of onion) grown on communal lands in Anloga. While plantation of trees itself leads to a higher sense of property rights because of a long term investment, it also makes way towards "individualization of rights" much noticeable in developed economies. On the other hand, most of the land in Angola is passed on through inheritance but majority of rights do not require lineage approval.

Results: Besley finds significant correlation in investment and property rights in Wassa but not so obvious in Anloga, despite controlling for endogenity and omitted variables in both. He can also not conclude as to which theoretical argument out of the security, trade and collateral viewsmost closely explains property rights and investment decisions. All in all, the paper hints that though increased property rights do affect investment, "the analysis of this paper warns against viewing it as a panacea for problems of low growth and investment before the process determining the evolution of rights is properly understood."

Education and GDP growth: Some figures from a natural experiment

Review: "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment" - Esther Duflo

In 1973 Indonesia under the INPRES (Indonesia Presidential Instructions) program, 61,000 primary schools were constructed - on average of two schools per 1000 children aged 5 to 14. What interested me in this article were two things:

1. While traditionally effects of education on GDP are biased by Ommitted Variables such as family and education, the OLS (Ordinary Least Squares Regression) and SLS (sum of Least Squares) results in this regression matched, showing no bias. Thus, estimates of returns to education in developing countries are not necessarily biased upwards as a result of ommitted family and community background variables

2. The number of schools constructed in a district was inversely proportional to the enrollment rate in schools, to encourage higher enrollment. Therefore, the "average educational attainment and wages in regions that received fewer schools are higher than in regions that received more schools." Traditionally it is considered that underpriviliged and racial minority area schools do not meet standardized testing and education enrollment standards. Hence it is believed that there should not be any investment therein because the returns would be low over the coming years because of negligible use of the initial investment. This article however shows that just the opposite is true -more schools should be built in low-enrollment areas for an overall increase in education. This is more equitable and thus would give higher returns to education because education would be diversified than being concentrated in one area or a locality.

The results of the research done by Duflo show that on average, the program lead to increase of .25 to .40 yrs of education and increased by 12% that an affected child would complete primary school. The program also lead to an increase of 3 to 5.4 % in wages.

Furthermore, this article shows that large scale government intervention focussing on quantity of schools was as important as raising quality of education since this program raised not only education levels but also wages. Therefore fears that large scale improvement in quantity might deteriorate quality of education are unfounded.

Though this article was generally about an increase in education enrollment and not the intake type of these Indonesian schools, more schools created on the concept similar to Sikhya would work doublefold - increase education and increase it amongst the poorest of the poor. Governments such as those of developing countries like India should thus focus on education for the slums on a massive scale. Free education not only for more engineers, doctors and lawyers but for overall developed personalities of a developed India.

(I found an exemplary school (Sikhya - "learning" in Hindi) in my hometown today which schools more than 800 slum kids, providing them vocational training, hygenic living, reading, writing, and on top of it, exceptional school education, all for free. So as I read this article by Duflo, Sikhya came to my mind as a practical example of improvement in education and its returns in developing economies.)

India's caste system and its effects on the rapidly globalizing economy

Review: "Traditional Institutions Meet the Modern World: Caste, Gender and Schooling Choice in a Globalizing Economy" by Munshi and Rosenweig

As I picked up this article and skimmed through it, what attracted me to it was its keywords of 'Bombay,' 'cast' and 'labor.' Fascinated to learn more about one of my country's most well known and most criticized social network - the caste system, I wanted to find out its ramifications on an economy besides the obvious social underpinnings.

Munshi and Rosenweig did a survey themselves of 4900 households in Bombay's Dadar area to find out that the social network of 'jati' plays a much more restrictive role for the boys in that area to continue with the traditional jobs their parents and grandparents engaged in. The "lower class" jati boys end up in non-English Marathi schools despite equal presence and quality of English ones in that area. This leads to their stickiness to unskilled manual jobs. Girls on the other hand, were conspicuously absent from the labor force at least until the 60s, allowing for weaker social networks to refer them into Marathi schools and subsequently lower paying jobs.

However, higher returns to English schooling did exist for both the sexes, English eventually becoming a "caste of its own." Girls were merely able to take more advantage of this shown by the figures that while 75% of the girls' paternal grandparents were in non-skilled labor, only around 40% of their parents were in such labor. For boys however, there isn't much difference in these figures. Modernization in Bombay's industrial market thus might eventually lead to the weakening of a century old social hierarchy. Intercaste marriages and migration to cities of skilled labor, which was a taboo in the past when networks were strong, is now becoming a common practice because of higher returns to English schooling and professional jobs. This has lead to diminished channeling of a worker into lower-paying jobs by a caste motivated labor network.

Although ideologically the caste system originated to allow specialization of labor, as thought of by Plato in his "Republic," the degrading inhumane stigmatization it lead to for the lower castes is well known. I always say that development must not only bring fancy cars and posh bungalows to an economy but revolutionize the masses' thinking for a more purposeful life than mere eating and drinking. This article seems to have shown that in the pursuit of those fancy cars, we do develop our thinking even though unwillingly. The breaking of such a strong social system by less than 20yrs of modernization shows what development can bring in once we're willing to work towards it.