India is buying Russia’s S-400 air defence system, and only recently the USA sanctioned China for it. What can India expect now?
Given President Trump’s rather vague response on the question of exemptions for India, it is clear that the foreign policy establishment in Washington is still uncertain on how to proceed.
Having said that, India is both an attractive market for American arms dealers, and is the lynchpin of America’s ‘Free and Open Indo-Pacific’ strategy. Both weapons manufacturers and the strategic community in Washington will probably weigh in favour of India.
Whatever the near term consequences for India, therefore, Washington will be compelled to accommodate India’s interests in the long term.
What are the military reasons for India to want to buy the S-400 from Russia at all?
The S-400 is a sophisticated anti-access/area denial missile system—a platform that no other country is likely to provide India, not even Washington. It will act as a crucial force multiplier in India’s border areas.
In addition to signing the S-400 agreement, economic and energy policy decisions were also taken. What was discussed in detail and what was agreed?
For me, the important takeaway was Russia’s offer to allow India to participate in energy and trade projects in the Arctic. This is an emerging, if often ignored, theatre of geopolitics. There will be a race to exploit the regions commercial opportunity and to define its governance architecture. It remains to be seen what India’s response to this will be. I hope the mandarins in New Delhi see the strategic importance of being a stakeholder in this geography.
What are the geopolitical considerations of the USA be if they were to make an exception in the case of India with waiver? After all, India is one of the most important geopolitical players in the Sino-Pacific region alongside China and Russia.
In the long term, India is an invaluable partner for Washington. Indeed by mid-century, India will emerge as one of the world’s largest economies—a process that will foster a gradual and organic rise in its strategic capabilities.
Two expectations will underpin Washington’s’ choices going forward. First, that investing in India’s defense industry will help Delhi balance China’s rise in the Indo-Pacific. And second, that India will eventually be able to anchor democratic norms and free trade in Asia by its own desires and design.
Some analysts claim that Russia is gradually beginning to change its position on the Kashmir issue because of growing cooperation with Pakistan. To what extent is this true and is there a realistic chance that India will politically prefer Russia to the US in the future?
Russia is not changing its position on Kashmir—Moscow’s courtship of Pakistan is based on two realities. First, that Pakistan will remain an interlocutor in Afghanistan, and will be important to Russia’s ambitions in Central Asia. Second, geopolitical equations in the region are changing rapidly— and just as India is reaching out to new partners, so is Moscow.
It is too early to pass judgement on these evolving partnerships. They are often driven by near term interests and global political uncertainty. It is very unlikely, however, that Russia will upset India over a highly sensitive issue like Kashmir.
India will not politically prefer Russia to the US—rather it must learn to work with both. In the Indo-Pacific, India’s equities lie with Washington, who’s economic and security presence can balance China’s rise. In Eurasia, Moscow will be its most important partner.
Meanwhile, the arch-enemy of India, Pakistan, is separating itself from the USA and is cooperating ever more closely with China, a close partner of Russia in turn. How does growing Russian cooperation with these two states affect the regional dynamics and decision-makings in India?
In the face of American sanctions, Russia’s only real choice is dependence on and partnership with China. While the close partnership between Moscow and Beijing certainly poses a problem for India, Moscow must also introspect on the sustainability of its arrangement.
Russia should be anxious about being economically and militarily displaced by China in Central Asia and Eastern Europe. The fact is that if Moscow seeks a multipolar Eurasia, it will have to bring India into the arrangement or risk acquiescing to China’s design.
India is cooperating closely with the US in Afghanistan to keep the Afghan government alive against the Taliban. What role does India’s position in Afghanistan play in the talks between Putin and Modi?
While both countries agree that peace in Afghanistan is a priority, they differ over political arrangements that need to be made. Further, with the US, Russia, China, Iran and Pakistan all in the mix, the situation in the region remains complex.
With Putin, India likely reiterated its long standing position that any initiative in Afghanistan must be led by the government. India might have also pushed forward the agenda agreed upon in Sochi—of pursing joint development projects in Afghanistan with Moscow.
Last year Russia called on India to join China’s Silk Road Project. India, however, seems to have reservations. This is mainly due to the China-Pakistan Economic Corridor (CPEC). For what geopolitical reasons does India reject a mega-infrastructure with China because of its cooperation with Pakistan?
CPEC is one amongst many objections that India has about the Belt and Road Initiative. The real issue, however, is that the BRI is a project designed, funded and executed only by China. As a key actor in the Asian century, India cannot allow China to dictate the terms of Asia’s governance.
China must adopt a more multilateral playbook if it wants Indian support for the BRI. India and other Asian powers must have a legitimate voice in creating the rules and institutions of the region and in benefitting from the commercial and trade opportunities.
In the 2040s, India is expected to surpass the United States (in PPP terms) and become the world’s second largest economy, behind China. Alongside this Indian emergence, the international order is undergoing significant change as well, with power increasingly diffused among states as a new, multipolar geostrategic landscape begins to emerge with fresh layers of complexities.
These developments have the potential to position India as the world’s most influential democracy in the second half of the 21st century, giving it the ability to shape the Indo-Pacific region and the dynamically evolving global order.
From the Indo-Pacific region to the world
At the Shangri-La Dialogue earlier this year, Indian Prime Minister Narendra Modi delivered a speech in which he argued that the “destiny of the world will be deeply influenced by the course of developments in the Indo-Pacific region”. This bold claim has come within the context of both growing economic opportunity and expanding strategic challenges for the region.
Sheer numbers alone elevate the importance of the Indo-Pacific and its influence across the world. It is now home to more than 65% of the world’s population who collectively produce more than 60% of global GDP. Over half the world’s trade passes through this region, and it hosts the fastest-growing armada of naval fleets along with seven nuclear powers. This region will also have a disproportionately high contribution to global growth in the decades ahead and will therefore ink the pen that scripts the new terms of trade, financial flows and investments, growth, humanitarian assistance, and peace and security.
Even as this redistribution of wealth and power propels this region to the global high table, a position it long enjoyed up to the 15th century, the multiplicity of old and emerging actors, and their varied interests within the region and beyond are spurring greater unpredictability and new anxieties. There are simply no reliable 20th-century templates to manage such a simultaneous rise of multiple actors and interests in a region. China, which was the first mover, now finds itself having to deal with the pushback to its own expansive plans, as well as with propositions from other initiatives such as the “Quad” (comprising of India, the US, Japan and Australia) that seek to steer the region’s future. There is little doubt that new pathways to a new order need to be discovered soon.
Modi’s speech at Shangri-La signalled New Delhi’s acceptance of this reality, and its willingness to embrace greater responsibility in anchoring a “rules-based democratic order” in the region. Indeed, as a rising economic power with favourable demographic conditions – in 2020, the average age in India will be 29 years old (compared to 37 in China) – India is well positioned to shape the future of the Indo-Pacific.
India’s vision for the region
India’s geostrategic vision for the Indo-Pacific is unique. It rejects pitting China against the Quadrilateral Initiative in a zero-sum competition “between free and repressive visions of world order”, as the American vision postulates. It also rejects the Chinese proposition, which creates perverse dependencies through economic statecraft and military coercion in a manner better suited to the Cold War era.
Instead, India is positioning itself to take a different path – one that does not see the world in binaries, bifurcated between partners and allies on one side, and competitors and adversaries on the other. India offers an opportunity for engagement and dialogue to all states, big and small, democratic and authoritarian, advanced or developing.
The new vision moves away from conceptions of non-alignment or strategic autonomy, tools of foreign policy that may have outlived their corresponding geopolitical utility. When Prime Minister Modi stated that “the Indo-Pacific region is not a limited club of members”, he signalled New Delhi’s intention to lead a new configuration of states, guided by communities that yearn for development, markets that require connectivity and nations that seek security.
The strategy calls for India to lead by example and show that as its capabilities rise over the coming decades, it will not abandon certain norms that reflect uniquely Asian democratic tendencies, open and transparent economic governance, and non-interventionist security paradigms.
Four steps for India to take
To put in place a vision that shapes the region and attracts others, India needs to script its own expectations from four key relationships.
First, New Delhi should define its ‘China policy’. It needs to determine what it is looking for from Beijing and make clear what it will refuse to put on the negotiating table. At Shangri-La, Modi made clear that no nation can unilaterally “shape and secure” an Indo-Pacific order. Delhi must be prepared to enforce this statement of fact as a baseline norm. An Asian ethic cannot be scripted by China alone, whether it is on infrastructure connectivity or managing security disputes. The economic prosperity of the region will be implicated by the strength of the India-China partnership.
Second, New Delhi should develop a clear policy toward the US. Thus far, New Delhi has essentially muddled through, deferring to Washington regarding policy in the region. India must answer whether it is ready, willing and able to play a larger role in defining a vision for the concert of democracies in the region and beyond. If, as Prime Modi recently indicated, the answer to all these is “yes”, New Delhi needs to put forth a more confident proposition for Washington to support. Is it now time to hand the baton over to India?
Third, New Delhi must rethink its engagement with its neighbours, particularly around two existing regional architectures. The South Asian Association for Regional Cooperation (SAARC), an eight-member union meant to advance economic and regional integration, is in tatters. The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), a seven-member organization meant to promote economic cooperation and trade, has turned into a forum for talk rather than action. Unless India presents a clear, enticing proposition to its neighbours, it will be hard-pressed to shepherd a new strategic vision in the larger region.
Finally, Delhi must engage more vigorously with the global institutional framework. At the World Economic Forum in January, Modi warned of a “gap between the old systems of [international] institutions and the needs of many developing countries”, echoing Delhi’s age-old grievance with the Atlantic institutions and a new sense that India must help close this ‘gap’. India’s pivotal role in the Indo-Pacific will be bolstered through its co-ownership of the institutions created by the developed world and in making them work in coherence with the new institutions such as the New Development Bank and the Asian Infrastructure and Investment Bank, in which India has significant stakes.
India’s Indo-Pacific vision exemplifies its ambition of being a “leading power”. Even so, it is merely the beginning of a decadal journey, which will see India shoulder the expectations that befit the world’s largest democratic economy. To do this, Delhi must constantly reassess the dimensions of change underway, visualize the possibilities that are on offer, anticipate the attendant risks and author the new order arising out of Asia.
Author: Samir Saran, President of Observer Research Foundation.
“Indo-Pacific” is in the news. The US has renamed its Pacific Command to the Indo-Pacific Command, the shared regional vision outlined by India and Indonesia has emphasised its centrality, and the region’s political importance to India was at the core of the expansive foreign policy speech delivered by Prime Minister Narendra Modi in Singapore. All of these are a response to the spectacular rise of China. If this points to a future concert of powers in the region to balance Beijing’s power play, it will be an important yet insufficient measure in reaction to the Chinese project that connects Asia and Europe.
Covering 35% of the earth’s surface, Eurasia is home to five billion people living in over 90 different countries and producing nearly 70% of global GDP. For millennia conquest, trade and migration have organically bound Asia and Europe – the ebb and flow of great civilisations across this vast landmass spawned myriad political and economic dynamics of global history.
Only in the recent past, in historical terms, have these been interrupted. The Industrial Revolution in Europe and the subsequent colonisation of Asia and Africa created an artificial divide, concentrating on economic and military power in ‘the West’.
Asia’s contemporary economic ascendance allows people, goods, innovation and finance to flow relatively freely across Eurasia again. But the re-emergence of the supercontinent is not frictionless. New integrative geo-economic forces bring with them new political tensions.
As history repeats and Eurasia coheres, the outlines of a new world order will be defined by who manages it and how it is managed. It is in this supercontinent that the future of democracy, of free markets and global security arrangements, will be decided. And there are three key factors influencing this.
The first, to borrow a phrase from Robert Kaplan, is the revenge of geography. As much as Eurasian integration is organic, its current ‘avatar’ is decidedly Chinese. Having assessed that the divide between Europe and Asia was an artificial, modern and ‘Western’ construct, China is doing what no other power had the appetite for: conceive of, define and then manage Eurasia.
The Belt and Road Initiative (BRI), Beijing’s choice of instrument, is creating sprawling networks of connectivity projects – each designed to embed dependency on China’s economy into this geography. Simultaneously, BRI dilutes the importance of the landmass’s sub-regions, thereby upsetting the settled balance of power arrangements.
India and the European Union (EU), for example, are struggling to curb China’s creeping influence on their sub-regional political, economic and security conversations. A “free and open” Indo-Pacific vision, and nascent coalitions like the Quadrilateral initiative seek to balance China’s rise on the maritime front. The oceans, however, are but one of China’s platforms – and a purely maritime response is inadequate.
China is relentless in pursuing this project: building infrastructure, facilitating trade, and creating alternative global institutions. Surreptitiously, China also exports its political model: “capitalism with Chinese characteristics” – a unique blend of state capitalism and authoritarianism. Unless liberal democracies propose an alternative in Eurasia that effectively addresses the infrastructure needs of countries in Asia and Africa, China’s proposition will succeed.
Here lies the second factor: the revenge of democracy. Whether it is the US, EU or India, democracies are more polarised than ever before. The Pew Global Attitude Survey consistently records that trust in democratic governments is at an all-time low. More than ever it appears that liberal democracies are bogged down by domestic crises, leaving them little energy for strategic planning. At a juncture when China’s timelines are decadal, democracies are struggling to look past their next election.
And the final factor, demography, is a double-edged sword for the entire region –, especially for China. For many Eurasian countries, BRI’s economic benefits are obvious. However, in an era when nationalism is the defining mood of politics, China’s presence can be unwelcome. China’s labour exports create tensions with younger host country populations who must now compete for employment opportunities. There is the risk that BRI will merely create infrastructure networks for extreme and radicalised organisations in unstable countries.
At home, demographic pressures might force Beijing to reconsider its ability to deliver. As younger Chinese move up the income ladder, their expectations from their government will increase. Simultaneously, the preponderance of single young men in urban regions and ageing rural populations makes Chinese society susceptible to violence and unrest. What will these demographic pressures portend for the project of Eurasian integration? Will the Chinese state have the political capital to recklessly buy influence across the world? Will demographic complexities allow others to cobble together a viable counter to the Beijing consensus?
Sitting in New Delhi, it cannot be more obvious that India’s development and security is inextricably tied to Eurasia. India sits at the crossroads of continental Eurasia and the Indo-Pacific – the two regions that will define this century. The US has expended blood and treasure over the past nine decades to maintain its privileged position in these two regions. Russia, the original Eurasian superpower, is reduced to a glorified policeman, or more charitably, a crafty risk management consultant for Chinese expansionism. And EU can either choose to be an actor or be acted upon, one slice at a time.
It is critical that all of them, and more particularly India and the US, imagine an arrangement beyond the Indo-Pacific, into the heart of Eurasia. China’s continental-sized poser requires a supercontinental answer. It is for the liberal world to stand up and be counted, or step aside and let Pax Sinica unfold.
Author: Samir Saran, President of Observer Research Foundation.
In 2017, the “Indo-Pacific” emerged as a defining geopolitical construct tying the future of states from East Africa to East Asia together with big powers, such as the US, China, India, and Japan.
While Beijing has grabbed headlines in its quest to dominate the eastern part of this integrated system in the South China Sea, in the western Indian Ocean it has managed to escape the constraints of geography, building influence and infrastructure that could lead to political, ethical, and ideological control over the Asian littorals.
In the western Indian Ocean, a battle for the soul of the Indo-Pacific is set to play out between China and the liberal order hitherto led by the US, and increasingly represented by India. While New Delhi and Beijing have initiated a tentative rapprochement, their interests do not align.
Despite Indian Prime Minister Narendra Modi and Chinese President Xi Jinping’s bonding at Wuhan a few days ago, it is clear that China’s “non-market” economics and military activism is beginning to shrink India’s strategic space in the western Indian Ocean.
Last month, the Maldives returned a gift helicopter to India, signalling a drift away from New Delhi and into Beijing’s embrace. Seychelles has failed to ratify an agreement with India on the construction of a military facility at Assumption Island, only weeks after Indian Foreign Secretary Subramanya Jaishankar signed a revised pact for its development, including the construction of an airstrip and a jetty for the Seychelles Coast Guard and Indian Navy. And Sri Lanka is handcuffed in a perverse relationship with the Middle Kingdom.
Yet with limited means and an economy less than a fifth the size of China’s, Delhi is displaying the gumption to fight back. President Ram Nath Kovind’s visit to Mauritius and Madagascar last month was perhaps evidence of India’s response to China’s challenge in the East African and West Asian littorals.
During a soft-power tour to boost India’s ties with Africa, Kovind committed a $100 million line of credit for defence procurement by Mauritius. Besides offering a multipurpose offshore patrol vessel, New Delhi also promised enhanced cooperation with the Mauritian Coast Guard, even expanding India’s constabulary presence in the nation’s exclusive economic zone.
India’s priority in Mauritius is developing a new airstrip and jetty facilities on the islands of Agaléga, presumably for future use by the Indian Navy, which is set to assist in the installation of state-of-the-art telecommunications equipment.
In Madagascar, Kovind promised greater cooperation in the “blue economy” domain, including the promotion of sustainable fisheries, maritime connectivity, marine resource management, ecotourism, and pollution control. Recognising India’s role in preserving regional peace and stability, Madagascar sought greater cooperation with the Indian Coast Guard and Navy.
Meanwhile, the maritime partnership with Mozambique remains in robust health. In February, New Delhi agreed to increase the training of military personnel and upgrade defence equipment and infrastructure, including medical facilities and hydrographic surveying of Mozambique waters.
The Indian Navy, which provided waterfront security during the African Union Summit in 2003 and the World Economic Forum meeting in 2004, considers Mozambique an indispensable strategic partner. In 2015, India even resurrected a dormant joint-defence working group with Maputo, expanding training and capacity-building aid to Mozambique’s intelligence service.
Many see the blossoming of Indo-French maritime ties as the proverbial “game-changer” in New Delhi’s expanding Indian Ocean diplomacy. Paris, which signed a logistical agreement with India in March, has a significant military presence in the western Indian Ocean. This pact, signed during President Emmanuel Macron’s visit to India last month, promises access to French bases in Réunion Island, not far from the Mozambique Channel, and also at Djibouti, where China inaugurated a logistical outpost last year.
New Delhi wouldn’t be averse to the idea of military presence in East Africa if Japan allowed Indian troops to use its facility at Djibouti, the first overseas Japanese military base since the Second World War. Japanese hardware and Indian human resources would be a formidable combination and fitting complement to the Asia–Africa Growth Corridor being pursued by both countries.
Another encouraging development is New Delhi’s decision to post a defence attaché to the US military’s Central Command Headquarters in Bahrain. With an area of responsibility extending up to the Red Sea, Gulf of Oman, Persian Gulf, and the Arabian Sea, Central Command exerts authority over naval operations in Afghanistan, Pakistan, and the oil-rich Gulf countries. It is also the lead player in anti-piracy and counterterrorist operations in the West Asian littorals.
If India’s new defence attaché in Bahrain facilitates better coordination and logistical support, the Indian and US navies could finally have a functional partnership in the western Indian Ocean.
But India still needs to combine its disparate partnerships in the West Asian littorals into a comprehensive strategy, placing trade and infrastructure connectivity at the heart of its maritime engagement. India must also convince partners such as the US, EU, and Japan of the strategic value in investing and engaging with this region in order to reduce regional economic dependence on Beijing.
Such an approach might also persuade Washington to abandon its schizophrenic approach to the Indo-Pacific, caused by dissonance in the posture and priorities of Central Command, Pacific Command, and Africa Command.
Both India and China realise that the normative and institutional architecture of the Indo-Pacific will shape the future international order. Ultimately, India’s engagement in the western Indian Ocean must not only protect its own economic, energy, and diaspora interests but also cohesively link with its “Act East” policy to preserve a rules-based order in the Indo-Pacific.
Whatever the costs, New Delhi must gear up for a sustained struggle to ensure openness, transparency, and a healthy balance of power in littoral Asia.
Authors : Samir Saran , President , Observer Research Foundation
Three of the fastest-growing applications of artificial intelligence (AI) today are a manifestation of patriarchal stereotypes – the booming sexbots industry, the proliferation of autonomous weapon systems, and the increasing popularity of mostly female-voiced virtual assistants and carers. The machines of tomorrow are likely to be either misogynistic, violent or servile.
Sophia, the first robot to be granted citizenship, has called forwomen’s rights in Saudi Arabia anddeclared her desire to have a child all in the span of one month. Other robots are mere receptacles for abuse.
The Guardian in 2017 reported that the sex tech industry, including smart sex toys and virtual-reality porn, is estimated to be worth a whopping $30 billion. This is just the beginning. The industry is well on its way to launch female sex robots with custom-made genitals and even heating systems, all in the quest to create a satisfying sexual experience.
The advent of sexually obedient machines – which are designed to never say no – is problematic not just because of the presumption that women can be replaced, but because the creators and users largely tend to be heterosexual men. The news of a sex robot being molested, broken and soiled at an electronics festival in Austria last year should hardly come as a surprise.
While one could argue that the use of sexbots could reduce the abuse and rape of women in real life, it is undeniable that these machines are created to serve some men’s perverse needs. The machine represents a new wave of objectification, one that could potentially exacerbate violence against actual women.
The arrival of lethal autonomous weapon systems (LAWS) or “killer robots”, on the other hand, threatens to de-humanize both the male and female victims of war.
On the one hand, autonomous weapons could reduce the number of humans involved in combat and even decrease casualties. Killer robots could ultimately bring down the human cost of wars. On the other hand, they could downplay the human consequences of combat — and indeed, violence itself — and lower the threshold for armed conflict.
Several states are calling for a pre-emptive ban of killer robots, afraid that they might lead to an AI arms race, one that could raise the risk of a violent clash. Should machines be allowed to make life and death decisions? Or should this choice stay in the hands of humans, however fallible they may be?
Finally, the development of voice assistants and Internet of Things (IoT) devices for the care of children and senior citizens is a market that is expected to expand rapidly in the next decade. The presumption that machines cannot invoke the emotional intelligence that care workers possess is increasingly being challenged with the emergence of smart tracking devices and health monitors that can observe and predict behaviour.
These innovations no doubt share their underlying technology with other voice-driven platforms such as virtual assistants – platforms often designed to mimic servility and subservience. It is no coincidence that voice assistants are often designed to sound and act feminine – take Apple’s Siri (in its original avatar) and Amazon’s Alexa. The more recent development of a ‘male’ option for voice assistants does not change the overall picture of male dominance and female servitude in AI.
Robots are expected to replace workers around the world.
When chatbots and voice assistants are fed on a diet of data assembled by male coders, machines perpetuate inequities found in the real world. This can have unintended consequences.
Given the general uncertainty surrounding the impact of AI on the real world, the responsibility of creators as well as broader communities merits all the more attention.
Today, machines reflect regressive, patriarchal ideas that have proven to be harmful to society. If this continues, technology may no longer usher us into a post-gender world. In fact, like all bad doctrines that have held communities back, biased codes may just institutionalize damaging behaviour.
Perhaps the involvement of more women and marginalized communities in the creation of AI agents could deliver the equity that we desire in future machines, and prevent the development of more patriarchal technology. If the machine is patriarchal, do we remove the more systemic condition of patriarchy or reduce reliance on the machine altogether? Both are easier said than done.
To build an equitable world, which will be inhabited by women, men and machines, the global community needs to script norms around the fundamental purpose, principles of design and ethics of deployment of AI, today.
Autonomous systems cannot be driven by technological determinism that plagues Silicon Valley – instead their design should be shaped by multiethnic, multicultural and multi-gendered ethos. AI and its evolution, more importantly, needs to serve much larger constituencies with access to benefits being universally available.
The administration of AI applications cannot be left to the market alone. Experience tells us that the market often fails and is regularly compromised by perversion and greed. History teaches us that when governments control, constrain and constrict innovation, they produce aberrant outcomes that are far from ideal. Norms developed by communities, instead, provide a workaround. We must promote norms that manage these technologies, make it available to those who need it most, and ensure a gendered development of this space led by a multistakeholder community that includes voices from outside the Atlantic consensus.
Authors
Samir Saran, Vice-President, Observer Research Foundation (ORF)
India currently faces multiple headwinds to industrial growth. These include muted private investment, protectionism emanating from OECD countries, and growing automation within production supply chains. In this context, GoI has done well to signal positive intent and political will to keep the economic engine churning by improving the business environment.
Commerce minister Suresh Prabhu’s revitalisation of the commerce agenda exemplifies this constructive approach.
India’s institutions, with their capacity deficits and coordination failures, require precisely this form of hands-on leadership where the prohibitive barriers posed by the need for inter-ministerial coordination are absent.
One area that fits squarely within the commerce ministry’s domain is FDI policy, a low-hanging fruit for Prabhu. The caveat is that some sector-specific FDI policies are jeopardised by legacy policy positions of other line ministries. Nevertheless, a large share of FDI in recent years has accrued to the services sector.
India’s economic growth seems increasingly contingent on a policy environment that supports investments at critical intersections of global value chains (GVCs) — such as services that add value to manufacturing, or those that facilitate better access to international markets.
All of this necessarily means more consultative reforms, and less idiosyncratic bureaucracy. The Single Brand Retail Trading (SBRT) policy announced earlier this year is the most visible example of the dissonance between 21st-century goals and a20th-century mindset. While this policy allows 100% FDI into singlebrand retail through the automatic route (the earlier limit was 49%), it falters on nuance.
For example, the erstwhile policy had prescribed that 30% of goods purchased by the retailer receiving FDI must be sourced domestically. While promoting local companies is a laudable goal, the means to achieve this was flawed. Little interest in new investment or manufacturing was generated.
Consequently, the Department of Industrial Policy and Promotion allowed retailers to offset local sourcing norms through exports. This step allows brands retailing their own products to source locally from India and integrate with GVCs. There’s just one glitch: the policy allows this only for an arbitrary period of five years.
Why switch to domestic procurement after five years? Why not promote manufacturing-linked exports as a specific category to offset domestic procurement requirements?
Bureaucrats, in all their wisdom, have also introduced a concept of ‘incremental sourcing’, which is impossible to interpret. It suggests that the percentage of sourcing in every year will be entirely discounted in the following year. So, companies would have to grow exponentially every year just to keep up with the exports-equivalent of the sourcing requirement. More importantly, this would automatically disqualify any company that intends to invest in new facilities and begin operations at full capacity.
Why treat value-added activity the same as trading? Further, incremental sourcing may work with one sector, and not with another. This is another failure to appreciate nuance. Perhaps there is an ex ante expectation that retail brands will not make large manufacturing investments (as they would have to start operations at scale, and not incrementally). This is a flawed expectation.
The logic behind allowing FDI in SBRT is to create the right incentives for domestic manufacturing, not the conditions for policy arbitrage by firms only interested in some form of trading. There is an opportunity here to signal a preference and strategic coherence. Companies should be encouraged to make in India, and export to the world.
The policy also restricts offsetting through entities that are not directly related, or a part of, the group companies that have received FDI. Nearly all global corporations work through agents and franchisees to complete specialised functions, such as manufacturing, retailing and exports.
GVCs are replete with examples of exceptionally sophisticated, multientity supply chains. So, the fear of policy misuse should be addressed through appropriate indemnifications and penalties in case of breach, rather than guidance on how to structure compliance.
Also, the policy ostensibly links the prospects of e-commerce retail to the opening of brick-and-mortar stores first, contradicting the very basis of GoI’s ‘Digital India’ programme. Investing in online business should be encouraged, not delayed.
Prabhu expects India’s GDP to touch $5 trillion within a decade. He expects asignificant share of this growth to come from efficiencies born of better logistics and digitisation. He intends to leverage India’s growing internal market, pool of tech-savvy workers and rapid digitalisation, towards enhanced integration into GVCs. Bureaucrats in the commerce ministry would do well to support this vision. And they can begin with fixing extant FDI policies.
About the Authors
Saran and Sharan are vice-president and visiting fellow, respectively, Observer Research Foundation, New Delhi.
India is at a crossroads. It has the largest young workforce anywhere in the world, and is the fastest growing economy today. At the same time, the economy is not creating enough jobs, and therefore not fully harnessing its “demographic dividend” in preparation for the “Fourth Industrial Revolution”. To create more and better jobs, certain fundamental realities need to be recognised – the untapped opportunities in the services sector, the imperatives of policy and regulatory stability, and the welfare needs of a new workforce. After briefly analysing the supply-side context (the characteristics of the so-called “demographic dividend”), this paper outlines a basic strategic roadmap for the demand side with a focus on constituents of the new economy (the industries that will have to generate new employment). It concludes with recommendations that can help bridge supply-side gaps, and demand-side imperatives.
Characteristics of the Indian Workforce
The Indian workforce has three distinct characteristics: (a) It is a young workforce; (b) the skills base of this workforce remains underdeveloped; and (c) most jobs are being created in the informal economy. These supply-side characteristics are explained first.
The Indian workforce is young and will remain young in future decades – a trend that immediately separates India from advanced economies; in which ageing workforces have to carry the mantle for the “Fourth Industrial Revolution”, characterised by “a range of new technologies that are fusing the physical, digital and biological worlds, impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human”.[i] According to the National Sample Survey (NSS) of 2011-12, around 36 percent of India’s total population are under the age of 17, and approximately 13 percent are between 18 and 24 years (Table 1). While over 41 percent of the population between 18 and 24 years are already part of the workforce, the others will be joining the workforce in the next two decades.
Table 1: Age Groups and Breakdowns of Population and Workforce, 2011-12, (%)
Age Group (in years)
Percentage of Total Population in Each Group
Workforce as Percentage of Total Population in Each Group
0-17
35.91
3.01
18-24
12.7
41.49
25-59
43.22
63.09
>= 60
8.17
34.48
Total
100
36.43
Source: 68th Round, National Sample Survey @ Observer Research Foundation’s India Data Labs
By 2030, when most countries around the world will have middle-aged or elderly workforces, India will still be young. For instance, according to the European Commission, without migration, the European Union (EU) workforce will shrink by 96 million workers by 2060.[ii]The demographic problems of other Organisation for Economic Cooperation and Development (OECD) countries are also well documented.[iii] Not only is the Indian labour force young, it is also characterised by low participation in the economy, with a participation rate of only 53.8 percent. This can partially be explained by low female participation and high youth unemployment.
Given its implications for policy planning, it is imperative to briefly disaggregate the sector-wise distribution of the young workforce (Table 2). For instance, despite the fact that the agriculture sector accounts for only around 16 percent of gross value added (GVA), close to 45 percent of those who are part of the workforce and are aged between 18 and 24 are engaged in it (Reserve Bank of India, 2013-14). Conversely, while the services sector accounts for over 60 percent of GVA, only around 23 percent of the workforce in the same age group are engaged in the sector. The services sector is much less labour-intensive and simultaneously more productive than the primary and secondary sectors.
Table 2: Share of Employment by Sector, 2011-12 (%)
Agriculture
Manufacturing and Mining
Services
0-17
52.44
33.32
14.23
18-24
44.75
31.79
23.46
25-59
47.24
23.67
29.09
>= 60
67.77
14.62
17.62
Total
48.66
24.38
26.96
Source:Source: 68th Round, National Sample Survey @ Observer Research Foundation’s India Data Labs
This cleavage between value addition and job creation is perhaps best exemplified by the fact that the number of ‘direct’ jobs created by the Information Technology (IT) and Information Technology Enabled Services (ITES) sub-sectors was only around three million as of 2013.[iv]Though the IT and ITES sub-sectors are the backbone of the services sector, they are understandably not as labour-intensive as factory floors (which in turn are also becoming increasingly automated). This partly explains why successive governments have tried to reinvigorate the manufacturing sector, even though it accounts for only 18 percent of the total GVA. The latest effort in this regard is the Modi government’s “Make in India” initiative.
India will find it increasingly hard to navigate the Fourth Industrial Revolution, which is capital intensive, and is already catalysing a new wave of high-end manufacturing in the West. One of the central challenges to the development of high-technology industries in India has been the lack of capital formation, as evidenced by the lack of capital market depth, and increasingly skewed patterns of wealth aggregation. These are also empirically validated trends, and therefore, observations on capital deficits in India will be limited to echoing the findings of Bosworth and Collins (2008), who suggest that the contribution of capital to India’s growth over 1993-2004 “remained well below those evident during the investment-led rapid growth experiences of the East Asia miracle…(and) in contrast, China achieved a rate of capital deepening comparable to that for East Asia in the 1978–1993 sub-period, and a substantially higher rate more recently”.[v]
Intuitively, a low-end manufacturing focused policy planning framework is not temporally consistent with the Fourth Industrial Revolution. In this context, the Indian services sector seems nimbler than manufacturing. This is primarily because it is not necessarily capital intensive and can harness India’s large young workforce and absorb previously excluded workers. This workforce can arguably adapt to technological changes – if it can be exposed to useful educational content, and adaptive learning. While India is often seen as the bastion of engineers and technology-savvy entrepreneurs, most of the country’s young workforce is ill-equipped to be part of a services sector-led transformation that can harness technology – this is the second key characteristic of the workforce. Only around a quarter of the workforce aged 18 to 24 have achieved ‘secondary’ and ‘higher secondary’ education, and close to 13 percent are illiterate (Table 3). Job-related skills, even after higher education, are often missing.
Table 3: Levels of Education by Age Group, 2011-12 (%)
Age Group (in years)
Illiterate
Up to Primary
Middle
Secondary & Higher Secondary
Diploma & Certificate Courses
Graduate & above
0-17
26.0
45.5
20.3
7.9
0.3
0.0
18-24
13.1
25.7
24.0
26.4
2.4
8.3
25-59
29.1
23.0
16.0
19.1
1.6
11.2
>= 60
54.5
23.7
8.2
9.3
0.6
3.8
Total
28.7
24.1
16.7
19.1
1.6
9.9
Source:68th Round, National Sample Survey @ Observer Research Foundation’s India Data Labs
There are unique technological phenomena that policymakers can exploit to address the skill development deficits in the country. For instance, there are nearly one billion mobile phone users in India.[vi] Despite the fact that millions of them are at the bottom of the socio-economic pyramid, and may not know how to read or write, they are “keypad literate”—meaning that they are able to use their mobile phones to access basic services and recall visual patterns. This has tremendous implications in different supply chains where information asymmetry erodes value generation. For instance, Dinesh Katre (2010) suggests that there is a large “opportunity for designing innovative mobile applications for an entirely new segment of (low income, illiterate and semi-literate) users like fishermen, farmers, carpenters, electricians, fabricators, vegetable merchants, shopkeepers, drivers, transport managers, traffic controllers, factory workers, building contractors…”.[vii]
The agricultural supply chain is perhaps the most obvious example, where imperfect information on weather phenomena and market prices are major reasons for suppressed agrarian incomes. While it is outside the scope of this paper to discuss how agrarian incomes can be brought back on track, it is clear that the means to affect changes that can enable greater value generation in agriculture are now within India’s grasp. Given the scale of telecommunications penetration (discussed later), it is safe to assume that a large part of the agrarian workforce already has the means to access information. Therefore, the question is: how should India leverage technological dispersion and close the gap on information asymmetries?
There are also many ways in which the advent of telecommunications on a large scale can be leveraged to overcome traditional service delivery challenges. The Indian government’s ‘JAM trinity’, of the Jan Dhan Yojana (a ‘banking for all’ scheme), Aadhaar number (a unique identification number for each citizen) and mobile phones, aims to do just this: use the potential of technology to enhance financial inclusion. Even if its implementation success or ethos is a matter of debate, the penetration of telecommunications technology is an added tool in the hands of policymakers to affect changes that can make India more future-resilient.
Related to this telecommunications opportunity is the potential of upgrading broadband technology, which is currently defined in India as internet download speeds above 512 Kbps. The National Telecom Policy, 2018, currently on the anvil, is likely to focus on achieving higher speeds in the broadband ecosystem. There are several constraints to the quality provision of broadband in the country including Right of Way restrictions that impact operators who lay optic fibre, and inconsistencies in telecom policies and regulations that have led to a congested wireless network and misalignment of economic incentives. Even countries such as the US, with legacy challenges in delivery of high-quality broadband services, define a minimum threshold of 25 Mbps for downloads and three Mbps for uploads.[viii]
However, India has close to 350 million broadband users, which is higher than most other major countries in the world as an absolute number. Therefore, in terms of penetration, the country is already well poised to harness the returns to increasing technological access from a low base. Much of the growth in internet access is driven by an increase in mobile phone penetration (wireless consumers in Table 4), which has led to India being called a “mobile-first” jurisdiction. If India can get its quality of broadband provision right – by focusing on addressing barriers to access and usage at the last mile – there will be a commensurately large opportunity for governments, private sector and civil society institutions to leverage the power of audio and video content, towards skill upgradation.
Table 4: Telecom Subscription Data, December 2017
Particulars
Wireless
Wire-line
Total
Total Telephone Subscribers (million)
1167.44
23.33
1190.67
Urban Telephone Subscribers (million)
668.44
19.81
688.25
Rural Telephone Subscribers (million)
499
3.42
502.42
Urban Tele-density (%)
163.44
4.84
168.29
Rural Tele-density (%)
56.28
0.39
56.66
Broadband Subscribers
345.01
17.86
362.87
Source: Telecom Regulatory Authority of India
The third key characteristic of the young Indian workforce is that the informal economy (characterised by the absence of social security) still accounts for a large share of employment creation, in both the organised and unorganised sectors of the economy (Table 5). It is simultaneously characterised by the prevalence of micro businesses and low value addition. This is related to legacy challenges such as the lack of capital market depth and consequent impact on long-term capital formation, limited natural resources, low levels of savings and wealth accumulation in absolute terms, and various other confounding developmental, infrastructural and institutional deficits.
Table 5: Prevalence of Informal Economy, 2011 -12 (%)
Sector
Formal
Informal
Total
Organised
47.52
52.48
100
Unorganised
5.82
94.18
100
Total
11.23
88.77
100
Source:68th Round, National Sample Survey @ Observer Research Foundation’s India Data Labs
In fact, the labour market has “become increasingly dominated by informal enterprises or informal employment” which is “traditionally characterised by low levels of productivity and low wages”, which is in turn reflected in the fact that close to 90 percent of the population is engaged in informal economic activities, yet their output only accounts for 50 percent of the nation’s gross domestic product (GDP).[ix]
An examination of the key productivity metrics of the Indian economy also points to the fact that there is large variance between the relative contributions of productivity growth to sectoral output (Table 6). Total Factor Productivity (TFP), generally defined as “the portion of output not explained by the amount of inputs used in production” is the measure of productivity used in Table 6 (the numbers are inclusive of the contribution of the informal economy).[x] TFP growth accounts for about one-fourth of the growth in GVA. The variation between sectors illustrated in Table 6 indicates that growth in the services sector, which accounts for the largest share of value within the GDP, has been in part driven by productivity gains, but there is still scope for improvement. One can reasonably infer that much scope also lies in the informal economy.
If India can improve productivity metrics in the informal services sector, there will be surpluses that can be channelled towards new business opportunities in the Fourth Industrial Revolution. As observed by Ghani, 2011, the “globalization of services provides many opportunities for late-developing countries to find niches, beyond manufacturing, where they can be successful”.[xi]
Table 6:Trend Growth Rate in Real Value Added and Contribution of Factor Inputs and TFP to GVA growth by Sector, 1980 to 2008 (%)
*Includes the contribution of land; **sectors as defined by the Reserve Bank of India report
The responsibility for the creation of productive and secure jobs for a workforce characterised by young demographic, low skill intensity and informal jobs, cannot be shouldered by the government alone. The private sector has an intrinsic role to play in generating value and creating the surpluses that can be reinvested in job creation through competitive industries and sectors. The primary role of government, therefore, is to allow for the requisite value creation in an economy characterised by high volume and low value markets. This is evidenced by sectors such as telecommunications, where the average revenue per user is among the lowest in the world, but the user base is among the largest in the world. The next sections discuss such demand-side imperatives.
Building Sectoral Focus
Some of the key supply-side characteristics of the workforce have been discussed briefly. It is equally important to assess demand-side characteristics. To do this, this paper first adopts a services-sector lens. The World Bank has highlighted the relatively larger contribution of growth in the services sector to poverty reduction compared to that of agriculture or manufacturing.[xii] The Indian government also expects a large part of GDP growth to be driven by the services sector.[xiii] Moreover, globally, trade in services has demonstrated greater resilience to economic shocks, in terms of lower magnitude of decline, less synchronicity across countries, and earlier recovery.
The current Foreign Trade Policy places emphasis on service trade exports and aims to grow this segment to US$300 billion – close to double the current levels. The uptake of the policy, however, remains limited at the level of small business. Owing to scale-related challenges across the board, participation of Indian businesses in international service markets remains below par, despite large opportunities. The “servicification” of manufacturing processes is one such opportunity. Producers and exporters of manufactured goods have become more reliant on services, such as design, marketing, distribution, banking, telecommunications and insurance to remain competitive.[xiv] Such value-added services are often disaggregated across geographies. This is a characteristic of production through global value chains (GVCs), which have become a prominent feature of trade over the last two decades.[xv] However, the level of India’s forward and backward integration into these GVCs leaves a lot to be desired (Figure 1).
Figure 1: Comparative Participation in GVCs, 2009
Source: OECD Stat and OECD-WTO TIVA, May 2013
Services account for almost half (46 percent) of value-added in exports globally. This share is higher in developed countries (50 percent) than in developing countries (38 percent).[xvi]There is little doubt that as progressive trade liberalisation and technological advances increase the fragmentation of production, GVCs will inevitably become a dominant feature of many industries within developing countries. India currently runs the risk of remaining locked into relatively low valued-added export activities. In order to leverage new global trade realities, Indian policies and businesses must rethink a manufacturing-centred narrative on employment creation.
India has to become a solutions provider to the world if it is to play a greater role in GVCs. It can capture a greater part of the value chain through integration of its robust services sector with regional value chains and GVCs. India’s vibrant export-oriented services market is relatively open in several sub-sectors (such as computers, audio-visual and engineering). There is visible improvement in policies in other traditionally closed sub-sectors such as telecommunications, broadcasting, legal and air transport services, although there is scope for further liberalisation that can aid competitiveness and integration with GVCs. For instance, while the broadcasting sector is allowed 100 percent foreign direct investment (FDI), there are cross-holding restrictions that prohibit broadcasters from owning more than 20 percent in distribution platforms such as Direct-to-Home and Headend-in-the-Sky. Similarly, while single-brand retail trading policy allows for 100 percent FDI, there are various prohibitive conditions attached to this, including a limited window for offsetting domestic procurement requirements through exports.
A major challenge for India’s integration into intra-regional value chains and GVCs is inefficiencies in the supply chain and the lack of supply chain standards – which is also connected to the competencies of the workforce. However, the actualisation of better supply chain standards will also require both demand side pull and supply side push factors. The demand side is clear – better integration in the GVCs as well as adherence to the stricter standards regimes that are emerging as a result of the proliferation of Regional Trade Agreements (RTAs). India has itself signed some 20 such RTAs over the last decade. As mega RTAs such as the Regional Comprehensive Economic Partnership (RCEP) become operationalised, the importance of standards setting in GVCs will become self-evident.
It is incumbent upon both the public and private sectors to build awareness and capacity at the level of small businesses, to improve product and service standards. The government needs to put nodal agencies such as the Bureau of Indian Standards (BIS) to work on new technologies, and services standards in particular. Currently there is asymmetric attention given to product standards in India compared to service standards. The BIS has issued approximately 3,000 manufacturing standards and 100 service standards. Moreover, most standard-setting bodies in India operate like a black box, allowing for very little industry feedback in the standards setting process, whereas they should actually be setting an example in terms of promoting multi-stakeholder interactions.
Additionally, much more initiative will have to be taken by “lead firms” across different supply chains, which have the wherewithal to understand and match regional and global standards requirements. Traditionally, investments by lead firms within their supply chains have been nominal, perhaps partly due to concerns around monitoring and evaluation of the proceeds of such investments. Consequently, the ability of Indian supply chains to match global standards has been in doubt. However, with increasing digitalisation, and easily available enterprise solutions, it would be reasonable to expect far greater supply chain investments in the future if large businesses see clear rationale in upgrading their own supply chains, so that their final products or services meet quality requirements of whichever market they want access to.
In sum, the convergence of digitalisation and supply chains is where India can claim its share of the GVC and simultaneously generate employment for its young, informal workforce. By becoming more competitive in non-manufacturing industries, such as design, content, new media, data analytics, logistics and other digital services, India can leverage digital technology so that its companies can interact seamlessly with the global economy. Needless to say, skill generation and upgrade will have to be juxtaposed against the creation of new jobs (i.e., the demand-side paradigm).
Regulating the New Economy
This section elaborates on demand-side drivers for job creation in India, with a focus on the nature of the largest regulatory challenges to the growth of the economy. Though the Modi government has shown that it is serious about making progress on Ease of Doing Business rankings, as seen in India’s progression in the World Bank’s annual estimates, such rankings do not sufficiently capture demand-side realities. Are Indian businesses better able to unlock value today because of an empathetic government that is sending the right signals to the market? One area to look for answers is in the domain of regulators – which are responsible for day-to-day oversight of most major markets, including technology markets that drive the new economy.
Regulatory uncertainty has been a persistent problem in Indian markets. This is because regulatory decisions in India are inconsistent, undermining the business environment. The lack of uniformity in decisionmaking has been identified as a key issue by the 13th Report of the Second Administrative Reforms Commission, which has delineated that regulators are established to help fulfil the overarching policy objective of the government. The report has further identified challenges in (a) consistency with respect to powers and functions of the regulators; (b) independence of the regulatory agencies; (c) uniformity in terms of appointment, tenure and removal of regulatory authorities; and (d) a legal framework that can direct the interface between the regulators and the government.
The persistent level of regulatory uncertainty in India can be inferred on several counts. In terms of the institutional landscape, the Modi government’s Finance Bill, 2017, prescribed the alteration of 19 regulatory tribunals and dissolution of several others, overnight. The Cyber Appellate Tribunal (CyAT) under the Information Technology (IT) Act, 2000, was one such tribunal, whose powers now reside within the Telecom Disputes Settlement Authority of India (TDSAT). In 2016, the Comptroller and Auditor General of India reported that the position of the CyAT chairperson had remained vacant since 2011. This had led to an immense amount of pendency in the system. However, the wider point to consider is whether the TDSAT, a tribunal that adjudicates telecom and broadcasting matters, is suitably equipped to handle cases under the IT act.
Similarly, the merger of the Copyright Board with the Intellectual Property Appellate Board (IPAB) last year, which was originally established under the Trade Marks Act, 1999, has raised doubts within industry about the ability of the IPAB to deal with cases linked to copyright, since it already has a large amount of pendency in matters related to patents and trademarks, and copyright is governed by another parent act.[xvii]
Regulatory uncertainty is also exacerbated by the fact that, in several markets, there is now increasing convergence between technologies and modes of distribution of products and services, which has been met with ad hoc government responses. The telecom and broadcasting industries constitute one such market, where through the spread of Over-the-Top (OTT) services, a new form of content delivery has been made possible over the internet. This content, unlike broadcast content, is largely based on the willingness of consumers to “pull” such content towards them. This fundamental distinction from receiving what is ostensibly “push” content – pushed to consumers by broadcasters through intermediaries like cable operators – reorganises the way in which governments should think about concepts such as consumer choice, certification, and economic protections for distributors.
The traditional way for governments to control new technologies has been through licensing – however, the proliferation of internet-based devices (exemplified by the term, “Internet of Things”) and content makes it impossible to think of such a paradigm without imposing strict restraints on innovation and even infrastructure development. For instance, without the virtuous cycle of content consumption, wherein new content available over the internet spurs new consumption, there would not be any logic in expanding network infrastructure. Part of the problem in India’s universal broadband provisioning under its “BharatNet” programme has been the lack of emphasis on the demand side and the last mile.
Therefore, like many other jurisdictions, India will have to invest in regulatory capacity building, and new models of regulating converging industries. This does not mean that India should necessarily create the equivalent of a digital industrial policy, with inbuilt protections for domestic industry, as the European Commission is aiming to do through its Digital Single Market strategy.[xviii] Rather, multi-stakeholder consultations must be used to find the right answers. While a few regulators have begun using public consultations as a tool for gathering multi-stakeholder inputs, which has led to greater decisionmaking transparency, much more can be done to engage with civil society and industry on such issues on a dynamic basis. New regulatory models like co-regulation with industry and civil society, as pioneered by Australia, can allow the government to solve complex challenges and dynamically respond to technological changes.[xix]
In fact, there are several digital domains that are currently being governed by legacy institutions that are not necessarily equipped to do so. A far greater degree of strategic thought is needed before imposing reactive regulations. E-commerce is one such realm, which does not have a parent ministry, meaning that various aspects of it are governed by different institutions, with a lack of overall policy vision for the industry. To wit, issues related to FDI in ecommerce are dealt with by the Department of Industrial Policy and Promotion, those related to consumer protection are dealt with by the Ministry of Consumer Affairs, those related to the IT Act such as intermediary liability and personal data are dealt with by the Ministry for Electronics and IT, those related to taxes are dealt with by the Ministry of Finance, and issues related to logistics and movement of goods are dealt with by a bevy of departments at the central and state government levels. While this may make some degree of intuitive sense to the reader, the challenge is that owing to a lack of overall policy vision for the industry, different arms and bodies of government will pull it in separate directions. The consumer perspective for instance, may be divergent from the tax administrators’, which may in turn diverge from the industry perspective, leading to suboptimal policy-making and regulation.
There is an additional element that adds to policy uncertainty – which is the participation of government entities in markets, wherein they play the roles of both operator and regulator. For instance, the Indian government operates its own debit cards and payments instruments. This is the case even as a largely government-run entity, the National Payments Corporation of India, plays a role akin to a regulator’s in the digital payments space. This inconsistency has been pointed out by several experts, including a high-level government committee constituted in 2016.[xx] Such operator-regulator conflicts were also pointed out in the past, in other related areas, by the seminal Financial Sector Legislative Reforms Committee in 2013, which explicitly stated that India needs better regulation “to encourage independent payment system providers, which are not linked to payment participants, thereby minimising moral hazard through conflict of interest…”.[xxi]
The overarching challenge for government is to create requisite capacities to think holistically about new industries that are attracting high volumes of investments and are among the fastest growing digital sub-sectors.
Towards a New Formality
The increasing avenues of connectivity – including through mobile phones – provide an opportunity for India’s young and dynamic workforce to enhance its skills and “digital literacy”. This paper has also sought to highlight why the Indian government must undertake key regulatory reforms and build standards capacity, and why the private sector must invest in supply chains to promote “services-led” growth. However, the success and transformative potential of the digital economy in India is also tied to the inclusion and welfare of a new workforce. Thus the supply side needs to be looked at again.
A “new workforce”, could imply two things: first, a workforce that is proficient in the digital economy sub-sectors; and second, a workforce that is digitally integrated into the development fold. The first element has been briefly discussed earlier. Taking up the second, to have a digitally integrated workforce, efforts are needed to bring previously excluded groups into the digital economy. This includes, in particular, women, who continue to face barriers to access and usage of digital technologies.
The digital economy has few parallels in governance, as it brings together a host of stakeholders who are invested quantitatively and qualitatively in its output. The “quantitative” output of a digital economy may be measured by indicators such as the number of successful businesses that constitute India’s nascent start-up ecosystem, the number of intellectual property (IP) applications filed annually, and the number of new consumers it draws into digital spaces. “Qualitative” aspects are less tangible, and therefore, more difficult to discern, even as they may be as important. Consider, for instance, the following question: will India’s workforce enjoy better standards of living and better work in the future?
Skills training and awareness schemes contribute directly to the capacities of the digital workforce. Similarly, the growing digital economy also contributes – in an organic fashion – to enhancing job prospects for a young and dynamic population. Regulatory reforms on areas like IP rights, net neutrality and competition, therefore, become all the more important as they will calibrate the consumption of knowledge by India’s digital workforce and create a new production economy in the digital sector. A key additional area for public and private sector partnerships and interventions will be the assurance of a greater degree of social security in the future.
It has been argued earlier that the private sector will play a crucial role in providing, through technological gateways, the “cover” that governments in the past offered to the formal sector – whether it is insurance, healthcare or other forms of financial inclusion. This act of providing formal social cover to the informal economy using digital devices, digital identity and digital last mile, is itself a new growth sector that can create new employment in services.”[xxii] Concomitantly, it is important that government does not regulate these technological gateways with a heavy hand, and applies an innovation-centric lens with requisite safeguards and constitutional principles in mind.
For instance, the financial sector, including banks and insurance firms, will likely be among the first-mover industries to use artificial intelligence and machine learning to enhance service delivery, and to develop innovative products that are highly individualised.[xxiii] This will require that government gives them enough regulatory space, through the use of instrumentalities such as regulatory sandboxes, and co-regulation. Government will also have to ensure, in concert with the private sector and some specialist civil society bodies, that standards-setting in such new service domains keeps up with international developments, so that the solutions derived in India are applicable elsewhere.
A formal job is characterised by welfare protections and legal oversight by the state. Conversely, according to the International Labour Organisation, the informal economy constitutes “workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements. Their activities are not included in the law, which means that they are operating outside the formal reach of the law; or they are not covered in practice, which means that – although they are operating within the formal reach of the law, the law is not applied or not enforced; or the law discourages compliance because it is inappropriate, burdensome, or imposes excessive costs.”[xxiv]By implication, the ability of the state to provide welfare and regulate diversified sets of economic activities, will determine the future of formality in India if this conventional lens is used.
However, an unconventional, and as yet untested, version of a new formality could be developed in India’s case. This new formality could “essentially provide each worker with income security (minimum wages), availability of health, retirement and life insurance cover (critical needs), and safe and congenial working conditions (safety)”.[xxv] Informal workers can be offered this support only if value generation and innovation by the private sector are encouraged – therefore, if government can adopt a dynamic, consultative and light-touch approach and provide infrastructural support. As it moves towards a new context for formality of a young workforce, India can begin to construct qualitative benchmarks that can serve its purpose.
This is no doubt a contentious approach as it goes against the grain of most literature and views on informality, that suggest that nothing short of a transition from informal to formal is desirable. However, in India’s case, the expanding digital economy is going to lead to the technological mobilisation of the informal workforce at an absolute scale that may be unprecedented, creating an opportunity for inclusive growth. It is therefore argued that this may mirror some of the trends that the OECD countries, such as the US, saw in the early parts of the 20th century, wherein there was “greater mobilisation of the informal workforce alongside the positive effect on gender gap in employment”, with the advance of technology.[xxvi] Moreover, technology will help identify each worker, and assure the worker of the benchmarks for a new formality, through better targeting and flexible delivery.
Technology will also allow for a certain degree of cross-subsidisation, as higher-end users will underwrite lower-end usage, as is being done in the case of the telecom sector’s infrastructure development (wherein higher-end users are paying many multiples of what the large base of the user-pyramid is paying per unit of data consumed). It is worth reiterating that the government will therefore have to ensure that the private sector is allowed to generate surpluses that can be reinvested in new infrastructure for targeting and delivery.
The relationship between India’s digital workforce and the digital economy is clearly symbiotic. Multi-stakeholder models of governance must account for India’s unique developmental concerns – especially the need to absorb communities at the margins into the economic mainstream – as they deliberate and implement digital economy policies. For state and central governments, as well as regulators, the twin goals of promoting affordable digital connectivity while ensuring healthy competition in the digital market is therefore important. The Indian state is wont to regulation, but the digital economy requires a nimble approach. Understanding that policies will not only affect economic output but also shape the skills and welfare of the digital workforce in the long run, is essential. The growth in India’s services sector, for the most part of the last two decades, has been organic – it has been shaped by the skills and knowledge of educated Indians. The digital economy holds the potential to further facilitate this flow of knowledge, and thereby absorb hundreds of thousands of Indians as effective contributors to the country’s workforce.
Conclusion
It is clear from the preceding sections that India requires a balanced approach to harness the potential of the digital economy. India’s unique workforce is young, under-skilled and largely informal. Appropriate focus is needed on both the supply side and demand side considerations outlined here. The services sector will have to be at the centre of this demand-supply matchmaking – given its structural importance in the economy, the prospects of greater integration with various value chains, and potential for job creation. This will require greater supply chain efficiency and improved standards. The scale of the challenge is daunting and exciting at the same time. It reflects an opportunity to upgrade supply chains, industrial and regulatory efficiencies, and of course, the young, under-skilled and informal workforce.
Specific recommendations towards this include the following:
Servicing ‘Make in India’: The Indian government’s flagship ‘Make in India’ policy of promoting indigenous manufacturing is premised on the assumption that there is no alternative for large scale employment generation. However, given that the services economy is an intrinsic part of manufacturing processes, and that there is an increasing “servicification” of trade globally, policy-makers must consider adding a strong service component to this policy vision. One concrete step towards this could be to build private sector awareness about the importance of supply chain standards, and for the government to develop a large range of service sector standards. Requisite infrastructure expansion (including digital infrastructure) will also have to accompany this focus, and so will forward and backward integration into GVCs.
Policy Stability and Innovation Centricity by Design: The Indian government will have to get serious about stability in policies and regulations, particularly those targeted at industries and sectors that constitute the digital economy. In practice, this would mean that India must conceive of a long-term digital economy vision, which balances imperatives of public access, innovation and growth, in a way that is fundamentally different from how this balancing act has panned out for traditional sectors that are no longer competitive in the global economy context. Regulatory institutions will also need to build capacities to scale with the digital economy, and will need to adopt a nuanced, light-touch approach as new markets develop. Towards this, there is no substitute to establishing inclusive multi-stakeholder processes, such as co-regulation, and regulatory sandboxes, that can also help counteract any hasty decisions.
Policy processes must also respond to uniquely Indian conditions. India’s expanding digital economy will touch many areas that are unregulated. The temptation of burdening such areas with adapted templates from legacy regulations and licensing frameworks will have to be resisted. These areas would include critical aspects such as data protection or regulation of services delivered through the internet. Policy-makers and regulators will have to juxtapose the imperatives of creating reasonable safeguards for citizens, preserving national security and institutions, with the need to propel innovation that can underwrite future infrastructure as well as generate the conditions for a new formality of the Indian workforce. India’s integration with regional value chains and GVCs will also be premised on this.
Reimagining the Digital Workforce: In 2009, the erstwhile government had set a skill development target of training 500 million people by 2022. The approach was premised on private sector participation. Many years since, the Modi government has actualised a new skill development policy with a similar private-sector oriented approach. Indeed, it is here that the large private sector’s intervention is desperately needed, and the government must allow for it to have the bandwidth to respond. For instance, the private sector has historically under-invested in preparing workers for responding to global supply chain standards. The result has been an inability to cope with new norms and compete in GVCs. The government has a role to play in reversing this vicious cycle, by allowing for creation of surplus value that can be reinvested in capacity building of workers, through adaptive learning and other available means discussed earlier.
Overall, a new approach is required to address new challenges linked to the future of the Indian workforce, and improving both quantitative and qualitative benchmarks through which future “work” itself is measured. India must adopt a policy approach that is holistic. It cannot afford anything less at this critical stage in its development trajectory, where there is a clear risk of institutions, and the overall political and administrative machinery, being overwhelmed by the sheer scale of the employment challenge. This means giving space to multiple stakeholders, fresh perspectives, and as inclusive a policy approach as possible, without diluting the impetus for an urgent response.
About the Authors
Samir Saran is Vice President of the Observer Research Foundation, New Delhi. and Vivan Sharan is a Partner at the Koan Advisory Group, New Delhi. and a Visiting Fellow at ORF .
Endnotes
[i] Shwab, Klaus, “The Fourth Industrial Revolution”, World Economic Forum, 2016
[ii] The EU’s Growth Potential vis-à-vis a Shrinking Workforce by Dr Jorg Peschner, EU Dialogue on International Migration and Mobility: Matching Economic Migration with Labour Market Needs, Brussels, 24 February 2014, European Commission paper, http://www.oecd.org/els/mig/Peschner.pdf
[iv] Human Resources and Skill Requirement in the IT and ITeS Sector (2013-17, 2017-22) KPMG, for Government of India, Ministry of Skill Development and Entrepreneurship and National Skill Development Council http://www.ugc.ac.in/skill/SectorReport/IT%20and%20ITeS.pdf
[viii] Defining Broadband: Minimum Threshold Speeds and Broadband Policy by Lenard g. Kruger, 04 December 2017, Congressional Research Service, https://fas.org/sgp/crs/misc/R45039.pdf
[xxii] In a Chapter on “The Future of Work”, in “Beyond Shifting Wealth: Perspectives on Development Risks and Opportunities from the Global South”, OECD, 2017
[xxiii] Artificial Intelligence and Machine Learning in Financial Services: Market Developments and Financial Stability Implications, Financial Stability Board, 01 November 2017, http://www.fsb.org/wp-content/uploads/P011117.pdf
“The superior man,” says the Analects of Confucius, “cannot be known in little matters but may be entrusted with great concerns.” As an ardent scholar of Confucianism, it appears that President Xi Jinping has taken this advice to heart. In March, Xi orchestrated the abolition of constitutional term limits for assuming presidency effectively making him the “chairman of everything” for life and entrusting him with the great concerns of party, military and state.
Xi’s consolidation of power likely has two objectives. The first is personal – Xi seeks to cement his legacy. Since Mao, no other Chinese leader has crafted such a cult personality. Having christened himself “Core Leader” at the 18th Party Congress in 2016, he has now firmly entrenched “Xi Jinping Thought” in the constitution, placing him on par with Mao Zedong and Deng Xiaoping.
The second is great power ambitions. Xi has set very clear timelines for achieving the “China dream”; otherwise known as the “two centenaries” – “moderately well-off society” by 2021, and a “democratic, civilised, harmonious, and modern socialist country” by 2049. By mid-century, Xi intends for China to become a “a mighty force” that would be an active “constructor of global peace, contributor to the development of global governance, and protector of international order.”
Xi is aware that China is at a critical juncture. He believes the time is right for China to reclaim its place in the world; and to supplant Western powers – especially America – as the leader of the international system. To view Xi’s power play as selfish dictatorial ambition, then, is superficial. Instead, it has more nuanced implications for China and the world.
First, Xi understands that the Communist Party requires a new social contract with its citizens. Over the past 30 years, China’s trailblazing economic growth has created a prosperous middle class and skilled professionals – many of whom now demand a better quality of life over high growth rates alone. Secure with his own position, Xi might be in a position to experiment with political reforms that could address this contradiction, and advance his “better life” agenda – including improving “deliberative democracy” by politically empowering local officials and creating new channels for public accountability.
Second, the pace of institutional reform will increase exponentially. As China becomes a global power, Xi understands that “going out” will require new standards for transparency, governance and performance in the economy if he is to sell “socialism with Chinese characteristics” to the rest of the world. Already, the National People’s Congress is assembling to consider enacting such reforms this year. Perfecting a unique blend of state control over industry and free markets will require painful and complex restructuring of administrative and economic institutions – and Xi wants an uninterrupted stint to see these reforms through.
Third, Xi has staked his legacy on the Belt and Road Initiative – the key instrument for his ambition of integrating Asia into a governance architecture that is more politically and economically cohesive than its sub-regions. The BRI must overcome several regional competitors to achieve its ultimate goal: creating new markets for high end Chinese goods in Europe. And Xi has made it clear that he is willing to use coercive statecraft to achieve this objective: ranging from Doklam-esque standoffs with India to “debt trap diplomacy” with smaller neighbours. With Xi at the helm, Asia must brace for a forcible attempt to reconstitute its geographical, political and cultural borders.
Fourth, Xi sees the reunification of democratic Taiwan with the mainland as a critical pre-condition towards achieving the “great rejuvenation of the Chinese nation.” Already, Taiwan is a souring flashpoint between the incumbent super power – America, which recently voted to increase government and civil society interaction with Taipei – and China’s rising ambition. Xi’s consolidation of political power, coupled with his agenda for institutional and functional modernisation of the army, and militarisation of the South China Sea point towards rising tensions on this front.
Finally, Xi faces the Putin paradox: massive concentration of power creates political losers; many of whom will often seek to exact violent revenge. Xi’s expansive anti-corruption drive, renewed political interference in companies, and rigid ideological control over public spaces have not all gone down well with China’s elites. At the same time, Xi will now also be seen as singularly responsible for policy failures – ranging from the economy to foreign affairs. Having amassed enormous power he must somehow craft a successful model for political transition when he does step down; or else face dire consequences for himself and for China’s stability.
Xi’s power grab will likely be a turning point in history. It brings stability at a time when China’s comprehensive national power is at its highest since ancient times; even as America and other Western democracies struggle to manage the international order they created. Simultaneously, China is a state and society in flux – high economic growth has created new political expectations and demands; and China must now shed its export led manufacturing strategy to embrace a new investment led model for the economy.
“Our mission is a call to action,” declared Xi at the 19th Party Congress, “let us get behind the strong leadership of the party and engage in a tenacious struggle.” If Xi can carry out his mission, he will not only oversee the arrival of China as a great power, but will also emerge as arguably the greatest leader China has ever known in modern history.
After a period of significant gains, achieved largely through the establishment of institutions that promoted international liberalism, the global order today finds itself at a crucial juncture. Rising inequality, the proliferation of nationalist politics, technology-induced disruptions and the resurgence of zero-sum geopolitics, are all beginning to shake the foundations of the global governance architecture built assiduously over the past 70 years. It is clear that the liberal order, as it is frequently referred to, will not be able to sustain its influence in the 21st century unless it finds new torchbearers in Asia, where politics and economics are scripting a story very different from that of post-war Europe. To some, it is evident that India, which has successfully combined economic growth with its own liberal traditions, will indeed be the heir to and guarantor of this system as an emerging and leading power.
In 2005, the Government of India launched the National Rural Health Mission (NRHM), promising to re-imagine primary healthcare and address the under-served needs of rural areas. The thrust of the mission was to establish a fully functional, community owned, decentralised health delivery system with inter-sectoral convergence that ensured parallel improvements in areas that impact health outcomes – such as water, sanitation, education, nutrition, and social and gender equality. It subsequently published the Indian Public Health Standards (IPHS) as a reference point for public healthcare infrastructure planning and upgrade of existing facilities. In May 2013, the Manmohan Singh Cabinet approved the framework, with Rural Health and Urban Health Missions as the two sub-Missions of the over-arching National Health Mission (NHM).[1]
Complementing NHM at the secondary and tertiary level care is the Rashtriya Swasthya Bima Yojana (RSBY) at the national level, and a number of state-level government health insurance initiatives. However, many big states like Uttar Pradesh do not implement RSBY, and the overall budget for such schemes remains limited. They often offer light financial protection and narrow coverage.
By the time the government established the NRHM, it had also made international commitments to achieve the Millennium Development Goals (MDGs). In fact, the 11th Plan laid out goals and targets that were more ambitious than the MDGs.[2] In 2015, the government ratified the Sustainable Development Goals (SDGs), committing itself to the inclusive and universal development of people and planets through cross-sectoral collaboration for equitable prosperity. Unlike the MDGs, the 17 SDGs and 169 targets announced at the UN General Assembly 2015 were developed by the countries themselves and aim to stimulate action over the next 15 years. Ensuring Universal Health Coverage for all citizens was seen as a critical strategy to achieve the SDGs. The 12th five year plan, Niti Aayog’s Three Year Action Agenda, as well as the National Health Policy 2017 have health targets well in line with the ambitious SDG targets.
# Expenditure by the centre includes central ministries such as Ministry of Health, Defence, Railways, Labour and Employment, Science and Technology, Mines and Post
Source: https://www.mohfw.nic.in/documents/publications
The Lancet Commission findings for India revealed that a $1-investment in health would yield a $10-increase in gross domestic product (GDP) by 2035.[3] Over the last eight years for which detailed official data are available, India’s health spending has gone up considerably, as Graph 1 shows. The seemingly sudden decline in the Centre’s share in 2014-15 is due to a change in statistical method – from that year, transfers to states through the treasury route were taken as part of state expenditure. The recent devolution and the changes in the structure of fund flows in the health sector (Box 1) have increased the proportion of money spent on health by the states. However, the increase in public spending on health – when considered as a percentage of GDP – remains more conservative, increasing over the last decade from 1.1 percent of GDP to 1.4 percent.[4]
Box 1: Recent Changes in the Structure of Fund Flows in the Health Sector
India has a federal structure of government, wherein a number of schemes in various sectors (including the health sector) are initiated at the national level and implemented at the subnational level. Till March 2014, the bulk of funds for these schemes were released by the central government directly to implementing agencies without involving the treasuries of the state governments. After March 2014, these funds have been released to the treasuries of the state governments, which in turn release them to state-level implementing agencies. The state-level implementing agencies further release funds to district-level, block-level and lower level implementing units. Public funds therefore, have to flow through multiple levels of governments and administrative units before these can be spent on the designated goods and services.
In 2014-15, the first year in which NHM funds were routed through the state treasuries, the utilisation ratio was much lower in ‘high-focus’ states than in ‘non-high focus’ states. This could possibly be a reflection of relatively weak institutions in the ‘high-focus’ states, which hindered easy adaptability to the change in the mode of fund flows. Source:
Despite the recent successes in disease elimination and the largest ever decadal decrease in neonatal, infant and maternal mortality, a large section of the Indian population still has limited access to quality healthcare. The newly released disease burden estimates underscore the health challenges faced by the Indian people.[5]
Health Challenges for India
Life expectancy at birth improved in India from 59.7 years in 1990 to 70.3 years in 2016 for females, and from 58.3 years to 66.9 years for males. State statistics however showed inequalities, with a range of 66.8 years in Uttar Pradesh to 78.7 years in Kerala for females, and from 63.6 years in Assam to 73.8 years in Kerala for males in 2016.
While the per person disease burden measured as the disability-adjusted life years (DALYs) rate dropped by 36 percent from 1990 to 2016 in India, there was an almost two-fold difference in this rate between states in 2016. Amongst the states, Assam, Uttar Pradesh and Chhattisgarh had the highest rates, and Kerala and Goa the lowest.
For India as a whole, the DALY rate for diarrhoeal diseases, iron-deficiency anaemia, and tuberculosis was 2.5 to 3.5 times higher than the average for other geographies at a similar level of development, indicating that this burden can be brought down substantially.
Source: India: Health of Nation’s States (2017)
The most important health system issue emerging out of the latest disease burden statistics is the considerable shift from infectious and maternal/child health conditions to non-communicable disease (NCD) conditions across states. India’s public health delivery system is still geared towards infectious diseases as well as maternal/child health conditions. There is very little in the existing structure to address emerging concerns like non-communicable disease conditions or mental health. If drastic changes are not made followed by sufficient funding, these emerging challenges will soon blindside India’s economic growth story.
Primary health services remain extremely inequitable within the country, both in terms of access and delivery. For example, according to data from 2017 calculated using the prescribed norms on the basis of rural population from Census 2011, Andhra Pradesh has a primary health centre (PHC) shortfall of four percent, Uttar Pradesh of 30 percent, Bihar of 39 percent and Madhya Pradesh of 41 percent.[6] Overall, the country still has a 19 percent shortfall of sub-centres, 22 percent shortfall of PHCs, and a 30 percent shortfall on community health centres (CHCs).[7]
Access and delivery problems are compounded by severe human resource constraints. Challenges prevail in three aspects of human resources for health: numbers, distribution, and skills. In terms of numbers, the country faces a shortage of physicians and specialists, with a doctor-patient ratio of 0.7 per 1,000. This is significantly lower than the global average of 1.4, as well as that of several other developing countries and emerging economies, including Brazil (1.9), Turkey (1.7) and China (1.5).[8] In March 2017, nearly eight percent of PHCs in India had no doctor and 18 percent were unsupported by pharmacists.[9]
While the National Health Policy (NHP) and its main implementation arm, the NHM, outline an ambitious vision, India’s investment is healthcare remains low. The majority of the population continue to bear the brunt of healthcare costs with limited accessibility to quality health services.
Indeed, despite a rapidly growing economy, government expenditure on health has seen no significant increase for a decade (2005-2014). It hovers between 1.1–1.4 percent of GDP, significantly lower than that of Nepal (2.3 percent), Bhutan (2.6 percent) and Sri Lanka (two percent), and shamefully lower than the global average of six percent. While the NHP talks about an increase to 2.5 percent by 2025, there is no clarity on how much the increase will be on an annual basis. The 2.5 percent allocation is despite the increase to three percent of GDP by 2022 recommended by the High-Level Expert Group (HLEG) on UHC set up in October 2010 under the auspices of the previous Planning Commission,[10] and takes no cognisance of a study conducted by Ernst & Young which estimated that government expenditure on health will need to account for 3.75-4.5 percent of GDP by 2022. As a result of the low priority given to public healthcare spending, Indians on average have a very high burden of out of pocket (OOP) expenditure on health (Graph 2).
Graph 2: Public Health Expenditure and Out-of-pocket Expenditure
The poor availability and quality of public health services is forcing people to seek care in the private sector. In India, the private sector provides more than 80 percent of outpatient care and 60 percent of inpatient care. With no widespread financial protection scheme in place, private spending on healthcare negatively impacts the financial stability of millions of Indians every year. Latest research using National Sample Survey Office (NSSO) data from 2014 found that the percentage of Indian households that fell below the poverty line due to OOP health expenditure was seven per cent of the total; this is a massive number.[11] OOP expenditure remains alarmingly high at 62.4 percent, as already discussed.[12] Based on NSSO 2014 data, of all health expenditure, 72 percent in rural and 68 percent in urban areas was on buying medicines for non-hospitalised treatment.[13]
Against this backdrop, Global Health Strategies (GHS), in partnership with the International Vaccine Access Centre (IVAC), Johns Hopkins Bloomberg School of Public Health, and the IKP Trust, undertook a study to evaluate public financing mechanisms capable of sustainably delivering UHC in India. The key recommendations of the study were that India urgently needs to re-examine both the provisioning and financing of healthcare.[14] In terms of provisioning, the government should aim to universalise free primary healthcare at the point of service. This will ease the load on the secondary and tertiary care centres. To finance this provision, a higher proportion of GDP will need to be allocated from tax revenues. There should be a national social health insurance (SHI) covering secondary and tertiary care for the entire population. Additionally, supplementary taxes such as sector-specific taxes, so-called ‘sin’ taxes, corporate social responsibility (CSR) contributions, tax-free bonds and trust funds could also be explored for specific health interventions over short periods of time.
The GHS study report was drawn up through literature review, interviews with experts and a high-level, national consultative meeting. This Special Report builds on the findings of the study and presents recommendations for a policy audience.
Why the Public Sector Must be Involved in Healthcare
Nobel laureate Kenneth Arrow had laid down the reasons why healthcare cannot be treated simply like any other commodity, to be sold and bought at prices determined solely by market forces. His argument was that the very unpredictability of health needs and expenses makes people less likely to provide for future health expenses than, say, for future housing or clothing needs—a phenomenon that he called ‘hyperbolic discounting’. A healthy person tends to think that health lasts forever. Access to health information is limited, making the patient dependent on doctors for crucial decisions about treatment and that too at a time when s/he is physically and mentally vulnerable and extremely easy to exploit. Trust is therefore the most important component of the doctor-patient relationship. Unpredictability of health outcomes, and the fact that patients are billed once a non-refundable service has been delivered, means that it is not possible to shop for health services the same way as one would shop for, say, toothpaste. There is also a demand-supply gap: the number of doctors available is limited; years of study and a licence to practice medicine are entry level barriers and justifiably so. That again makes it different from shopping for toothpaste because, in theory at least, there is no limit to the number of companies that can manufacture toothpaste.
International examples bear out Arrow’s argument that governments need to be the actively involved in healthcare, as it is not a standard market good. In Japan, for example, 82 percent of all health expenditure is publicly funded. The Organisation for Economic Co-operation and Development (OECD) countries’ average is 72 percent. Japan has a mandatory health insurance scheme, with premiums based on the socio-economic status of beneficiaries. Healthcare in Sweden is primarily funded by the government, which raises money through taxes. At 11.9 percent of GDP, the Swedish government’s spending on healthcare is one of the highest in Europe. International precedents show that when public spending on healthcare rises to around six percent of GDP (the global average for UHC systems) OOP payments fall below 20 percent of total health expenditure.
In India, the over-reliance on a largely unregulated private sector is fraught with risks of unnecessary costly interventions being chosen over more cost-effective options. That this is already happening is clear from National Family Health Survey 2015-16 (NFHS-4) data that shows that approximately twice the number of babies are delivered by Caesarean section (C-sec) in the private sector as compared to the public sector.[15] While World Health Organization (WHO) guidelines suggest that C-sec should be prescribed within the range of 10-15 percent of total births, private sector rates range from 87.1 percent of deliveries in urban Tripura (compared to 36.4 percent in the public sector) to 25.3 percent in urban Haryana (compared to 10.7 percent in the public sector). WHO also says that while C-secs can reduce chances of maternal and child mortality, there is no evidence of any extra benefits if the rate rises above 10 percent in a population.
The quality of care in the private sector is not always up to standards prescribed by Indian Public Health Standards (IPHS). A study in rural Madhya Pradesh found that only 11 percent of the sampled health-care providers had a medical degree, and only 53 percent of providers had completed high school.[16] Thriving quackery, not just in rural areas but also in urban pockets, is an open secret. Recent examples from Delhi private hospitals show that high-end, expensive hospitals can also have uninterested and callous administrations, thus not necessarily providing quality care to paying patients. Big hospitals may not be available near most rural or low-income communities, being concentrated mostly in urban areas where people have the capacity to pay high amounts. However, what keeps the private sector hospitals – which are a highly differentiated set in terms of size, quality and cost – receiving the bulk of the patient load is that they are available round the clock, at close proximity to the community.
This is not to say all private sector hospitals are bad and should be done away with. They have an important role to play in a country with a large population and limited government intervention. The problem is an over-reliance on the largely unregulated private sector where payments are mostly out-of-pocket and high. This can and does result in negative conditions of over-treatment, poor quality, selective care, and cost escalations.
India Needs to Spend More and Spend Better
Health is a state subject. Yet it is the Centre that is the prime mover behind the National Health Mission, which is a core central scheme. Despite the focus on healthcare in the Budget 2018, the actual allocation for NHM decreased from INR 31,292crore in 2017-18 (revised estimate) crore to INR 30,634 crore (budget estimates) in 2018-19. This is a decline of about two percent from the revised estimates of 2017-18.[17]
In addition to the inadequacy of funds, the inconsistency in the timing of funds released by the Centre to state governments has contributed to inequity in terms of service delivery across the country.[18] On average, there were more unutilised funds at the end of the year in the states that needed them most. A 2017 study by the influential National Institute of Public Finance and Policy (NIPFP) and WHO India on utilisation, fund flows and public financial management under the NHM found that at the state level, a file with a request for release of funds has to cross a minimum of 32 desks while going up the administrative hierarchy, and 25 desks on the way down. The study recommended streamlining processes to ease the rigidities of the state treasury system.[19]
One of the primary operational hurdles that the NHM faces is the absorption of funds by states because of their erratic periodicity of release. Sometimes this can be a chicken-and-egg situation. In the first quarter of 2015-16, for instance, 57 percent of NHM allocations were released. However, the corresponding figure was 29 percent in 2014-15 and 46 percent in 2013-14. Similarly, analysis by CBGA shows that while the overall central health budget in 2018-19 was increased, allocation for , Reproductive and Child Health (RCH) component in 2018-19 (budget estimate) has in fact declined by 33 percent from 2017-18 (revised estimate). Along with this , the allocation for Pradhan Mantri Matru Vandana Yojana (PMMVY), which was earlier called the Maternity Benefit Scheme, has also decreased by eight percent over 2017-18 (RE)[20]
It is believed that strengthening health systems will increase the states’ capacity to absorb increased allocations, and should be prioritised, particularly in high-burden states and districts.[21] Poor absorption and distribution of funding at the state level leads to an accumulation of unspent resources each year. This lack of absorptive capacity at the state level has been used both as a justification for the Centre’s non-release of funds, as well as an argument for decreasing overall funding for healthcare.
Primary-Care Network: The Gatekeeper
For India, both generating resources for UHC and designing health systems to implement it are challenges. The best solution to both may be for a comprehensive and quality primary care network to act both as the preventive pillar of the health system and also as a gatekeeper to higher levels of care. Patients need not reach secondary and tertiary care centres without being referred there. This primary care network has to be accessible to all, and free at the point of access so that the OOP expenditure problem can be dealt with. There are international precedents of such an approach. Spain, Thailand, Kyrgyzstan and Colombia have successfully rationalised hospital care through referral management. In Thailand, a gate-keeping system prevents patients from going directly to general or regional hospitals without a referral from district hospitals (except in an emergency or when paying OOP directly). Today 45.3 percent of patient visits are to healthcare centres, 37 percent to district hospitals, and only 17.8 percent to tertiary care centres. The National Health Accounts (2013-14) showed that of the overall expenditure, primary care took up 45.5 percent, secondary care 34.8 percent and tertiary care 16.1 percent. [22]
A study by Harvard University in 2017 on state-level, primary-level expenditure trends found that among the 16 states studied, some poorer states have already started focusing on primary care, and that states like Chhattisgarh, Rajasthan and Assam spend more on it in per-capita terms than better-off states like Kerala or Gujarat.[23] However, the study also found that the primary care expenditure as a percentage of total government health expenditure has either plateaued, or shown a downward trajectory for the last three to four years in 11 out of the 16 states.[24] It is well established that a functioning primary-level care delivery system can take considerable patient load off the secondary and tertiary hospitals. There are yawning gaps in the existing primary care network with some states being far better organised than others. Addressing the infrastructural and human resource gaps in primary care will go a long way in addressing overcrowding in urban hospitals, as well as controlling household costs.
The private sector’s focus on costly tertiary interventions rather than primary prevention has given rise to a situation where the limited number of doctors available crowd these better paying centres while there are few doctors to be found for primary care. This pushes people to seek treatment at the tertiary centres. Investment in primary care therefore has benefits at multiple levels: prevention, gate keeping, and putting an end to the crowding at tertiary care centres whether public or private.
Human Resources
Medical education in India is currently geared towards producing specialists rather than family physicians who are the bedrock of primary care. Every year 60,645 medical graduates qualify to be part of the public health system but opt out of it for a variety of reasons – poor pay, remote locations, and lack of facilities. Across the world, countries have tried to contend with this problem in their own way, but for India, perhaps, the best option could be for the government to train non-physician medical providers like nursing practitioners (with BSc Nursing degrees), Ayurvedic practitioners (with Bachelor of Ayurvedic Medicine and Surgery degrees), and Dentists (with Bachelor of Dental Surgery degrees), all of whom would require additional training and formal certification in allopathic primary care. The Supreme Court, in its ‘Dr. Mukhtiar Chand & Others Versus the State of Punjab’ judgment in 1998, acquiesced in legal feasibility of such an approach, specifically for BAMS doctors, who are in adequate supply.[25] In this vein, the National Medical Commission Bill, 2017, has suggested a bridge course to enable practitioners of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homeopathic (AYUSH) systems to practice modern medicine, despite widespread protests from professional associations.[26] Given the limited MBBS output, the best solution here too may be focused training of MBBS doctors, rather than looking at the long-term option of increasing post-graduate seats in medicine.
CASE STUDY: Immunisation
Every dollar spent on vaccines in low-income countries yields a $16 return in direct costs and a $44 return in indirect costs within a decade. It is one of the most cost-effective options of preventive health. India has its own vaccine success stories. It followed up its 2014 achievement of polio-free certification, with the elimination of maternal and neonatal tetanus in 2015. It owes both these achievements to a concerted immunisation effort. However, children in India continue to die of vaccine-preventable diseases. It has the largest number of under-five deaths in the world, at 1.2 million, comprising 20 percent of the global total. India’s share of pneumococcal, rotavirus and measles deaths is 25.6 percent of the global toll.[27] India’s per capita immunisation spend is just $8.88, far less than Bangladesh ($34.61), Nepal ($29.96), China ($22.09) and Pakistan ($13.14). It was among the last four countries to approve Haemophilus influenza type B (Hib) vaccine to prevent pneumonia, along with Indonesia, Belarus and South Sudan, and it has only recently introduced the vaccine in its immunisation programme.
Recent data shows that India’s performance in ensuring immunisation coverage has been slow, with worrying reversals in some key states. Research by Observer Research Foundation has shown that prior to the NRHM, full immunisation coverage in India improved at a sluggish pace from 35.4 percent in 1992-93 to 42 percent in 1998-99 and 44 percent in 2005-06. NFHS-4 found that immunisation coverage had increased to 62 percent in 2015-16. Although post-NRHM, the pace of immunisation has accelerated, the improvement is far less than, for instance, in the case of institutional births (births taking place in a medical institution rather than at home) which grew from 39 percent in 2005-06 to 79 percent in 2015-16.[28] The following graph shows the current levels of full immunisation coverage across Indian states and UTs.
In the last few years, there have been many additions to the Universal Immunisation Programme (UIP), and Mission Indradhanush – introduced in 2014 – which aims to fully inoculate all children under the age of two with seven essential vaccines by 2020. Pneumococcal Conjugate vaccine (PCV) was introduced in 2017; Inactivated Polio Vaccine (IPV) has been rolled out nationally; rotavirus vaccine is available in nine states, and Japanese Encephalitis (JE) vaccine in all priority districts. However, the projected cost of these vaccines will have to be taken into account as India increases allocation to healthcare as it has committed to do in the NHP. The procurement cost for these life-saving UIP vaccines is expected to go up 6.5 times, from $88 million to $565 million for complete scale-up of Pneumococcal Conjugate Vaccine (PCV), Rotavirus, Measles Rubella (MR), Inactivated polio vaccine (IPV) and Pentavalent vaccines as per the comprehensive multi-year strategic plans (cMYP) costing and financing tool for immunization. With a forecasted budget increase from $694 million to $1.44 billion, the funding gap for UIP is set to rise to 37 percent of total programme costs, or $534 million. For now, the Global Alliance for Vaccines and Immunisation (GAVI) has contributed $500 million but it is targeted only at poor countries; and as India graduates to middle-income country status by 2021, it will no longer be eligible for GAVI support. Sustainable domestic funding options will have to be explored. India has historically never rolled back a vaccine once it was introduced in the UIP.
At a high level national consultative meeting organized by GHS, a panel of experts recognised that maternal and child health have to be seen as an investment rather than expenditure and the most cost-effective intervention, vaccination, is a priority investment for the nation’s future. It should also therefore be classified as capital expenditure rather than revenue expenditure.
Financing Options for UHC
In most countries in the world that have managed to implement UHC, the bulk of the funding comes from general government revenues (tax financing) and public contributions towards a social health insurance programme. In India, general tax revenue is the source of 90 percent of public health funding, but the low tax to GDP ratio (17.7 percent) is the spoiler. However, countries with lower GDP growth and economic potential than India have done it. Mexico moved towards UHC by increasing public spending on health from 1.9 percent in 1996 to 3.25 percent of GDP in 2014. Thailand doubled its public expenditure on healthcare from 1.66 percent in 1995 to 3.2 percent of GDP in 2014. Both countries have a tax to GDP ratio almost identical to India’s, although both are much richer.
While increased allocations from the general tax pool could help finance primary healthcare, supplementary resources will be required to fund secondary and tertiary healthcare. No examples of a universal healthcare system funded purely by general taxation exist anywhere in the world. Even the National Health Service (NHS) in the UK is funded by a combination of general taxation (around 80 percent) and national insurance contributions (close to 20 percent). The UK’s tax to GDP ratio is around double that of India’s but public funding on health is more than five times (as a percentage of GDP). That is why a mandatory social health insurance may be a good option; however the relatively small size of India’s organised sector may prove a roadblock. The effort should be to pool the already large OOP expenditure on health into pre-payment pools and enable users to spread the expenditure over a longer time-frame by pooling of risks.
Statutory health insurance (SHI) schemes function by mandating payroll contributions from workers, pooling the resources collected, and earmarking them for a comprehensive health benefits package for all. Risk pooling is a mechanism by which revenues are aggregated to spread financial risk of health expenditures across individuals and over time. Pooled revenues are used to pay for healthcare needs of individuals, reducing or eliminating the need for OOP expenditure at the point and time of service. It is also essential for a universal care package to be clearly defined and to include outpatient services, cost of medicines and a continuum of care feature.
Mandatory health insurance contribution may have political implications in a cost-sensitive society like India. However, if the resources raised by the government are effectively earmarked for healthcare, the willingness of the middle and higher income-groups to contribute will be higher since their expenses would then amount to an investment with a clear return. There are some existing insurance schemes like the Employees’ State Insurance Scheme (ESIS) for factory workers and the RSBY for the informal sector workers, which are now being planned to serve as blueprints for wider health protection schemes. In the Indian context, a national social health insurance scheme should cover the entire population, where the government pays for the poor and vulnerable, the formal sector pays through mandatory payroll contribution, and innovative mechanisms are explored to charge fees from the informal sector. The current UHC plan of the government seems to be around National Health Protection Scheme (NHPS), which is an enhanced version of the RSBY.
Nearly 22 percent of Indians live below the national poverty line, and the poorest 40 percent have access to only 20 percent of total income. Reaching these sections will involve substantial administrative costs. Community outreach may be an important first step before moving on to more sophisticated tools to decide eligibility. In 2012, both Turkey and Indonesia replaced community targeting based on local expertise, with rigorous registry through a clearly defined methodology, with increased and more equitable enrolment success. The Philippines also initially used community-based targeting where local governments identified beneficiaries, enrolling millions of people identified as poor in a health insurance scheme financed by the central government. But in 2009, the central government imposed a more rigorous methodology through the National Household Targeting System. The new system revealed that only 800,000 of the beneficiaries qualified as poor and were thus eligible for subsidies, and that many households that were poor had not been enrolled in the subsidised health insurance programme. Given such inclusion and exclusion errors, any such mechanism should have the required flexibility and consider the households that fall into poverty every year due to health related expenses.
What kind of money can mandatory payroll contributions generate? An early estimate based on income-tax collections in 2014-15 of INR 284,266 crore (PPP $160 billion), shows that between INR 14,000 to INR 34,000 crore (PPP $7.7 billion to $18.9 billion) could be raised, with contributions ranging from 5-12 percent. This figure would provide a significant contribution to the NHP target of 2.5 percent of GDP for universal coverage, equivalent to 25 percent of the current shortfall in spending.
Reaching informal sector workers may prove to be the real roadblock for India in rolling out an SHI. The informal sector employs 91 percent of the workforce in India. However, countries like Vietnam (68.2 percent in the informal sector) and Thailand (42.3 percent) can serve as models. Vietnam uses tax funding to reduce the premium for the informal sector by 50 percent, while Turkey employs a sophisticated system to determine appropriate premium payments for informal sector workers through scoring estimated income, property value and car cost. Multiple governments, including those of Colombia, Mexico and Thailand, originally charged the informal sector for participating in health insurance schemes, but have since extended full subsidies to these populations. For India, the platform of Jan Dhan, Aadhaar and extensive use of mobiles could provide the building blocks for identifying and enrolling the target population.
Supplementary Funding
General tax revenues and SHIs can be supplemented by sector specific taxes. The erstwhile education cess, for example, was instituted to fund the government’s Right to Education (RTE) obligations; the National Clean Energy Fund was set up to tax INR 200 per tonne of coal imported or produced in India. There is also the Central Road Fund since 2000, to improve road infrastructure, which taxes petrol and diesel, and which was increased in 2015 from INR 2 per litre to INR 6. The existing 3 percent education cess on personal income and corporation tax was converted into a 4 percent “health and education cess” by Budget 2018 to fund the initiatives for families in rural areas and those below the poverty line.[29] The increased cess is expected to collect an additional ₹11,000 crores per year, and be a main source of funding for the proposed National Health Protection Scheme (NHPS). The education cess had increased total allocation for elementary education from INR 5,000 to INR41, 000 crore between 2004 and 2013. Another source of funding could be “sin” taxes, a concept that currently applies to tobacco and alcohol in India, though such taxes are not a sustainable long-term source. .[30] A tax on aerated sugary drinks and junk food can be considered, with the added advantage of thereby reducing their consumption and impacting NCDs in the process.
The CSR contributions of the private sector too could be harnessed for health purposes. Section 135 of the Companies Act 2013 made India the first country in the world to legislate for mandatory CSR contributions. All companies with a net worth above INR500 crore, or a turnover above INR 1000 crore or an annual net profit of above INR 5 crore are required to spend 2 percent of their net profit on CSR related activities. The Act lists a series of legitimate recipients of CSR contributions, including campaigns such as reducing child mortality and improving maternal health.
The scheme stands to raise a significant amount of money for development projects. In the first year of implementation in 2014-15, Indian companies paid out around INR 6,400 crore in CSR payments. Reliance Industries Ltd was the top contributor, funding approximately INR 761 crore of the total collection, followed by the state-run Oil and Natural Gas Corporation Ltd with INR 495.2 crore. However, in 2015, KPMG found that more than half the 100 largest Indian companies had failed to meet their targets. CSR contributions, along with funding by the government, could possibly help strengthen the primary care network. Tax free bonds and trust funds too could generate some funds, though CSR may be the most promising option.
Budget 2018 as an Ambitious Foundation for the Way Forward
Budget 2018 with the proposed Ayushman Bharat initiative is a landmark moment in India’s healthcare policy. After the launch of NRHM, it is perhaps for the first time that health is getting such attention in the union budget. However, despite the ambitious beginning, NRHM (now NHM) failed to improve the primary healthcare infrastructure in any substantial way. GHS (2018) found that more than 80 percent of the increased service provision under the NHM was attributed to just 20 percent of health facilities. In 2017, only 11 percent sub-centres, 16 percent primary health centres (PHCs), and 16 percent community health centres (CHCs) were found to be functioning as per Indian Public Health Standards (IPHS) norms.[31]
The ambitious National Health Protection Scheme (NHPS), which promises to expand insurance cover from current low levels to a substantial 100 million households is expected to improve access to secondary and tertiary healthcare tremendously. Building on the gains of the past decade, India continues to follow a two-pronged strategy of demand side as well as supply side interventions in healthcare. The Empowered Programme Committee of NHM approved ₹1,200 crore for 2018-19, and ₹1,600 crore for 2019-20 for setting up 1.5 lakh health and wellness centres. This means that the sub-centres, the lowest rung of the NHM structure, will for the first time, move beyond providing antenatal and postnatal care, and immunization services. The Finance minister in his budget speech confirmed this commitment this year.[32] If implemented well, this initiative will take comprehensive primary healthcare services closer to the people who need them the most. It also has the added benefit of taking some burden off the secondary and tertiary care delivery system. However, per sub centre, current year’s allocation translates to only ₹80,000, which may prove to be inadequate given the ambitious objectives.
The Budget 2018 makes it clear that India’s medium-term pathway to UHC is a continuation of the last decade’s strategy of provisioning-insurance mix at an expanded scale. It will be key how the government addresses the severe health workforce shortages in the public hospitals so that part of the huge insurance bonanza (amounting to INR 15000 Crores) flows back into the public healthcare delivery system and rejuvenates it. It is expected that the proposed merger of three unlisted public sector general insurance companies will help keep the insurance premium within NHPS substantially low compared to RSBY.[33] The rapid expansion of the insurance coverage is also expected to kick in economies of scale and help keep costs low. Yet, offering a substantial health insurance cover of INR 500,000 for 100 million households with the available resources will be a big challenge within the current cost parameters.
Increase in government investment in healthcare is the most preferred option on the road to universal health coverage. This is not just because it has the highest benefit to cost ratio, but also because increased public sector investments would better enable a significant section of the population to access improved healthcare. This would also enable emerging lower middle-class groups that demand better healthcare but find the rates in the private sector unaffordable. However, apart from looking at increasing the spending on health, India also needs to look at more efficient means of spending that money. This can be achieved by prioritising high impact system design changes and interventions like immunisation which give the biggest impact for every rupee spent.
The focus has to be on improved, accessible and quality primary care. To chalk out the implementation blueprint, a committee of diverse stakeholders and policy makers needs to be established to further evaluate these recommendations and use them to develop implementable guidelines. Given the potential of rapid expansion of fiscal space, it should be possible for India to eventually bring in the remaining 150 million households into a truly universal system, which integrates NHPS with the primary healthcare delivery system in the medium run. How a diverse India choses to do it will offer lessons to dozens of other countries who plan to make UHC a national mandate and expand health coverage to yet uncovered population groups.
About the Authors
Anjali Nayyar is Executive Vice President, Global Health Strategies. Dhruv Pahwa is Senior Director, Global Health Strategies. Samir Saran is Vice President, Observer Research Foundation. Oommen C. Kurian is Fellow, Observer Research Foundation.
[15] While this also is an indicator of availability of health care infrastructure, there is disturbing data to show the increase in C-sections that may not have been required
[16] Patel et al. 2015. Assuring Health Coverage for All in India. The Lancet 386: 2422-35.
[27] Liu L, Oza S, Hogan D, et al. Global, regional, and national causes of under-5 mortality in 2000-15: An updated systematic analysis with implications for the Sustainable Development Goals. Lancet 2016.
