77081 April 2013 India Development Update Economic Policy and Poverty Team South Asia Region The World Bank Group India Development Update April 2013 Table of Contents Executive Summary ....................................................................................................................................... i 1. Recent Economic Developments .......................................................................................................... 1 1.1 GDP and its components ............................................................................................................... 1 1.2 Balance of Payments ..................................................................................................................... 2 1.3 Inflation and financial sector......................................................................................................... 4 1.4 Fiscal Developments ..................................................................................................................... 5 2. Outlook ................................................................................................................................................. 7 3. India in the Global Context ................................................................................................................. 11 4. Financing Progress to Universal Health Coverage ............................................................................. 13 5. References ........................................................................................................................................... 20 This update was prepared by Denis Medvedev and Smriti Seth (SASEP) under the guidance of Vinaya Swaroop (Sector Manager, SASEP) and Deepak Bhattasali (Lead Economist, SASEP) and on the basis of discussions with experts in New Delhi’s think tanks and policy making circles. Section 3 was authored by Tehmina Khan and Sanket Mohapatra (DECPG) and Section 4 was authored by Somil Nagpal (SASHN) with inputs from Gerard La Forgia, Ajay Tandon (EASHH), and Smriti Seth (SASEP). The team benefitted from valuable comments and discussions with Martin Rama (SARCE), Rinku Murgai (SASEP), and Sudip Mozumder (SAREX). Onno Ruhl (Country Director, SACIN) and Ernesto May (Sector Director, SASPM) linked the team to the Bank’s overall strategy and steered them in that direction. The updates are published twice yearly and give an overview of developments in the Indian economy in a global context, and also highlight topics related to medium- and long-term growth which are in the public debate at the time of writing. A special topic of the current update is India’s march towards universal health coverage and its fiscal implications. India Development Update April 2013 Executive Summary The Indian economy is expected to expand by FY2014 and 6.7 percent in FY2015. In the 5.0 percent in FY2013. With this outturn, India longer term, given favorable demographics, is likely to remain one of the faster-growing rising educational attainments, and high rates of nations in the world, although the expected pace capital accumulation, India could well achieve takes a step back from the very high growth and surpass the average 8 percent GDP growth rates achieved in the late 2000s. As economic recorded over the past ten years. conditions around the globe remained challenging during the year, a large number of Continued progress on the reform agenda is countries experienced a deceleration in growth key to mitigating downside risks. The and India was no exception. However, while the authorities’ ability to respond to negative persistent weakness in the global environment external shocks is more limited today than contributed to the slowdown in India’s growth, during the 2008-09 global crisis. Although the only a small portion of the deceleration can be RBI continues to maintain ample reserve attributed directly to the adverse contagion coverage, further shocks to the current account effects from the euro area debt crisis. could put further pressure on the rupee. Fiscal prudence will become increasingly important in Inflation and fiscal deficit have declined, but the near future to achieve further reduction in the current account deficit has widened. The debt-to-GDP ratios. Continued progress on the Reserve Bank of India (RBI) has had to strike a domestic reform agenda to encourage tough balance between providing some investment and unlock supply constraints while monetary stimulus and restraining further price adhering to fiscal consolidation is critical to growth. As inflation, measured by the wholesale supporting growth and lowering macro price index, has begun to decelerate in recent vulnerabilities. months, the authorities may gain additional policy room. Fiscal performance by the states Additional efforts may be needed to create has largely followed the adjustment path the fiscal space for India’s progress towards recommended by the 13th Finance Commission universal health coverage. Based on recent and, although the federal government deficit trends in the roll-out of a new wave of remains elevated, policy actions to reduce fuel government-sponsored health insurance schemes subsidies and the recently presented FY2014 (GSHIS) launched since 2007, the share of Union Budget have reaffirmed the central Indian population covered by some form of authorities’ commitment to fiscal consolidation. health insurance could rise from 25 percent in Weak exports, elevated imports, and a 2010 to 50 percent by 2015. In particular, the significant depreciation of the rupee in the first coverage of GSHIS could increase to more than half of FY2013 have widened the current 500 million persons by 2015. While the schemes account deficit to a record high, although recent are a crucial component of building human data point to some narrowing of the trade gap. capital and fill an important niche for an otherwise under-served population, the Going forward, growth is expected to additional expenditures required to finance the accelerate to its high long-run potential. initiatives could amount to 0.4- 1.0 percent of Recent data point to some improvement in GDP in 2015. Based on recent history and under economic activity. Private consumption and the benign assumptions of the baseline scenario investment growth accelerated in the third developed in this update, the central government quarter of FY2013. In the last few months, WPI is likely to be able to finance its share of the inflation fell below 7 percent, exports growth incremental expenditure towards broadening turned positive, and imports growth decelerated. access to GSHIS. However, divergence in With a pick-up in domestic activity and a growth performance at the state level and the gradual improvement in the global environment, lower income elasticities of public health growth is expected to accelerate to 6.1 percent in expenditure at the state level imply that a i India Development Update April 2013 number of states may need to substantially reallocate fiscal resources to finance the expansion of GSHIS. Alternatively, the central government may have to take on a greater share of the cost, a prospect which could make the progress towards fiscal consolidation more challenging. ii India Development Update April 2013 1. Recent Economic Developments of activity in the services sector, bringing down its projected growth rate to an eleven-year low 1.1 GDP and its components of 6.6 percent in FY2013. Sectors like logistical services (e.g., transport, etc.) and financing and Economic growth slowed in FY2013. The business services were particularly affected. growth of real GDP at factor cost fell to 4.5 However, in a sign that the deceleration may be percent y-o-y in the third quarter (Q3) of bottoming out, there was some pickup in FY2013, the slowest pace in the past 15 industrial growth in Q3 FY2013 to 3.3 percent quarters.1 On a seasonally-adjusted annual basis, y-o-y from 2.7 percent in the previous quarter, Q3 growth came in at 4.6 percent, below the primarily due to an improvement in growth rates achieved in the previous two manufacturing activity. quarters.2 The industrial sector, particularly manufacturing, was affected by weaker investment and export demand, reflected in a fall in production of capital goods and consumer durables. Contraction in the mining sector, on account of sealed mines, also contributed to the industrial slowdown. Agriculture growth was also affected by a delayed monsoon and lower- than-expected winter crop; it fell to 1.8 percent during FY2013 from 3.6 percent in the previous year. Private consumption and investment gained some momentum in the last quarter. During the first half (H1) of FY2013, private expenditure and investment were affected by low levels of confidence. The business expectations index, as estimated by the RBI’s industrial outlook survey, fell by 6.4 percent during the first three quarters of FY2013 and consumer confidence in current and future economic conditions also worsened during the fiscal year. However, growth in final Weakness in the industrial sector pulled consumption expenditure and gross fixed capital down growth in services. Growth in the formation picked up in Q3 FY2013, suggesting industrial sector began weakening in FY2012 as that the slowdown in demand may be bottoming mining activity stalled and manufacturing output out. Private final consumption—which decelerated. These weaknesses continued in decelerated to an average growth of 2 percent y- FY2013, bringing down the average industrial o-y during H1 FY2013 from 8 percent in the growth to 3.3 percent during FY2012-FY2013 previous year—gained momentum and grew at from 9.2 percent during the preceding two years. 4.6 percent y-o-y during Q3. Similarly, growth Through forward and backward demand in gross capital formation improved to 6 percent linkages, this outturn precipitated a deceleration y-o-y in Q3 from an average growth of -2.8 percent in the previous two quarters and 4.4 1 Throughout the document, FY2013 refers to fiscal percent during FY2012. On a seasonally year ending March 31, 2013. adjusted basis, both private final consumption 2 Seasonal adjustment carried out with and investments registered the highest q-o-q TRAMO/SEATS. growth rates in more than five quarters. The 1 India Development Update April 2013 pick-up in momentum was also reflected in the the increase in the overall trade deficit—driven production of capital goods, which registered by a growing gap in merchandise trade— positive m-o-m seasonally adjusted growth rates explains the entire deterioration in the current for four consecutive months since October. In account balance. contrast to the private sector, growth in public consumption slowed in line with the central government’s fiscal consolidation efforts, declining to 1.9 percent y-o-y in Q3 from an average growth of 8.1 percent during H1 FY2013. Exports underperformed while imports remained elevated. In 2011, India’s export volumes grew by 25 percent, outpacing both the global and developing country averages (6.1 and 7.2 percent, respectively). However, as global trade growth decelerated to 3.6 percent in 2012, 1.2 Balance of Payments India’s export volume growth fell even more After widening to a record high last year, the sharply to 2.5 percent. The combination of this current account deficit deteriorated further deceleration in exports volume growth and a in FY2013. In FY2012, the deficit on the current substantial depreciation of the rupee over the account for the first time exceeded 4 percent of same period resulted in a 6.5 percent decline y- GDP, after averaging 2 percent of GDP during o-y in the US$ value of merchandise exports the previous five years. The deterioration in the during Apr-Dec FY2013. Imports, on the other current account balance continued in the current hand, remained virtually unchanged (in US$) fiscal year when the deficit rose to a record 5.4 due to largely to a 13 percent y-o-y increase in percent of GDP in the first three quarters of oil imports, which account for more than one- FY2013, compared to 4.1 percent during the third of total imports. Although oil prices corresponding period a year ago. Moreover, the retreated from their highs of early 2012, the worsening in the current account balance volume of oil imports grew by 15 percent in Q1- occurred despite a robust inflow of remittances, Q3 FY2013, negating any potential which increased to 1.7 percent of GDP during improvement in the trade balance.3 As a result, Q1-Q3 FY2013 from 1.6 percent last year. the merchandise trade deficit widened by nearly 11 percent in US$ and, due to the depreciation Worsening of the merchandise trade balance of the rupee, more than 27 percent in INR, explains the entire deterioration in the driving the widening in the current account gap. current account. Compared to the first three quarters of last year, the merchandise trade deficit widened to 11.3 percent from 10 percent of GDP. Some of the deterioration was offset by 3 The cost of food imports rose substantially in an improvement in services trade, which rose to FY2013 due to a rise in global food prices, but this a surplus of 3.5 percent of GDP during Q1-Q3 had a small impact on the overall trade balance as the FY2013 from 3.4 percent last year. Nonetheless, main categories of food imports amount to less than 3 percent of GDP. 2 India Development Update April 2013 The trade balance showed signs of improving inflows increased by 21 percent y-o-y during the in recent months. Merchandise export growth first three quarters of FY2013, but this growth (in US$) turned positive during the first two was significantly below the 40 percent outturn months of 2013, bringing down the decline in registered during the corresponding period of exports from 6.5 percent y-o-y during Apr-Dec FY2012. Consequently—even though capital to 5 percent y-o-y during Apr-Feb. Growth in inflows continued to provide more than ample merchandise imports also slowed to 1 percent y- cover for the current account deficit—the extent o-y during the Apr-Feb period from 33 percent of the cover came down substantially. last year. As a result, the trade deficit, which touched an all-time high of US$22 billion in The depreciation of the rupee appears to have October (24.7 percent y-o-y growth), fell to lost steam, and the currency strengthened in US$15 billion by February 2013 (same as the second half of the year. With a weaker BoP February 2012). In an attempt to control the position, the rupee continued to lose value trade deficit by curbing gold imports—which during FY2013 and hit an all-time low in June, accounted for more than 10 percent of total remaining around that level until August. imports in Q1-Q3 FY2013—the authorities Between April and August 2012, the monthly increased import duties on refined gold from 4 average INR/USD exchange rate depreciated by percent to 6 percent and on gold ore and bars 7 percent. However, during the last quarter of from 2 percent to 5 percent. 2012, like currencies of most emerging economies, the rupee gained value and appreciated by 2 percent between September and January. While some of this appreciation can be attributed to a weaker dollar, it could also partly be due to an improvement in investor sentiments after the announcement of new FDI policies in September. The real effective exchange rate (REER) mostly mirrored the movement of the nominal exchange rate: it fell by 5 percent between April and August and gained 2 percent since. However, the REER has remained below its long term average. Capital flows remained robust due to an influx of portfolio investments and NRI deposits. India, like several other emerging markets, attracted an influx of net portfolio investments during the first three quarters of FY2013, worth US$14.2 billion, up from US$2.7 billion during the corresponding period last year. In addition, a depreciated rupee and deregulated interest rates helped increase NRI deposits during Q1-Q3 FY2013 by 66 percent y- o-y. FDI flows, however, declined during the first three quarters of FY2013 by 26 percent y- o-y, due to poor business sentiment and Foreign exchange reserves declined somewhat uncertainty surrounding the FDI policies. In but the import cover improved. As of end- order to attract more FDI inflows, the March, foreign exchange reserves held by the government took several steps to encourage RBI were US$1.8 billion less than a year ago, foreign investment by allowing FDI in multi- partly because of valuation effects and partly brand retail and aviation. On the whole, capital 3 India Development Update April 2013 because of interventions in the forex market.4 Core inflation is now within RBI’s comfort However, the import cover (of reserves) level. Core inflation, or manufactured non-food improved to 6 months in FY2013, up from 5 inflation, is the biggest component of overall months in FY2012, due a fall in import demand. inflation and is used as a proxy for elastic consumption demand by the central bank. It fell External debt rose but remains low as a share to 3.8 percent y-o-y in February 2013, compared of GDP. Higher NRI deposits, commercial to an average of 7.3 percent during FY2012 and borrowings and trade credits pushed up India’s well within RBI’s comfort level of 4 percent. external debt to US$376 billion by December 2012, an increase of 9 percent from the Food inflation remained high while fuel beginning of the fiscal year. However, external inflation accelerated after deregulation of debt remains relatively low at 20.6 percent of diesel prices. Food wholesale inflation averaged GDP. The composition of external debt also 9.3 percent y-o-y during Apr-Feb FY2013, changed gradually, with an increased share of significantly above 7.1 percent y-o-y during the short term obligations, particularly trade credits. same period last year due to a surge in vegetable The share of short term external debt (by prices. Consumer food inflation averaged a original maturity) increased to 24 percent by slightly higher 10.7 percent between April and December 2012, from 21 percent two years ago. February. In the meanwhile, wholesale fuel Foreign reserves cover of external debt has inflation rose to 10.5 percent y-o-y in February eroded over the years, from 98 percent in March from 7.1 percent in the previous month after the 2010 to 78.8 percent in December 2012. government allowed phased deregulation of diesel prices in January. 1.3 Inflation and financial sector After pausing for nine months, softening Headline inflation fell to its lowest level in inflation prompted the RBI to reduce lending over three years. Wholesale inflation averaged rates in two consecutive review meetings. The 7.4 percent during Apr-Feb, down from 9.1 central bank reduced the policy repo rate by 25 percent during the same period last year. bps twice (in January and March) to 7.50 However, , headline retail inflation increased to percent, after holding it constant for the last more than 10 percent y-o-y after December— seven meetings. The RBI governor cited even as wholesale inflation continued to softening inflation and decelerating economic decrease—primarily because food prices have a growth as the primary considerations for higher weight in the consumer price index. monetary easing. Slowing economic activity and rise in non- 4 Foreign exchange assets including gold, SDR, and performing loans affected credit expansion. IMF reserve position. Foreign currency reserves Growth in gross bank credit slowed to 8.4 (excluding the three items above) declined by percent between Mar 2012 and Jan 2013, from US$343 million relative to last year. 4 India Development Update April 2013 10.5 percent during the same period last year. legislation and prior to countercyclical stimulus This slowdown was the most pronounced for in response to the global crisis. small and medium industries, and the services sector. Part of this slowdown in credit was due Revenues underperformed as the pace of to increased risk aversion in the banking sector economic activity slowed. Although gross tax as asset quality deteriorated, which prompted revenue improved to 10.4 percent of GDP from banks to switch from credit creation to 9.9 percent a year ago, the increase was 0.2 investments in SLR securities or government percent of GDP less than the budgeted amount. bonds. Ratio of gross non-performing assets Corporate taxes, excise taxes, and customs (NPAs) to advances increased significantly from duties each brought in 0.1-0.2 percent of GDP 2.95 percent in March 2012, to 3.59 percent by less than expected, while income tax revenues September 2012 for all commercial banks- were 0.1 percent of GDP higher. Non-tax amongst which public banks were the worst revenue was 0.3 percent of GDP lower than affected. budgeted, due mainly to lower-than-expected proceeds from telecom spectrum auctions. As a Credit growth has outpaced the growth of result, total revenue and grants reached 8.7 deposits. Despite a slowdown in credit percent of GDP, 0.3 percent of GDP higher than expansion, credit growth has been above the last year but 0.5 percent of GDP below the growth in deposits. The liquidity deficit budgeted amount. remained above the RBI’s comfort level during most of FY2013 as the credit-deposit ratio of commercial banks increased to 77.4 by January 2013, from an average of 76.5 in FY2012. To raise liquidity, the RBI lowered the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) by 0.75 percent and 1 percent, respectively, during FY2013. It also injected primary liquidity worth 1.5 trillion rupees into the economy through several open market operations. 1.4 Fiscal Developments The Union Budget delivered on the Finance Minister’s commitment to contain the fiscal Expenditure compression in the social sectors deficit. The FY2013 overall deficit—using the and reduction in capital spending allowed for government of India definition—was limited to reaching the fiscal targets. Despite the lower- 5.2 percent of GDP, above the 5.1 percent goal than-expected revenues, total expenditure was in last year’s budget but below October’s revised contained to 14.1 percent of GDP, 0.5 percent of target of 5.3 percent. Using the World Bank GDP below budget and 0.2 percent of GDP less definition, which discounts one-time divestment than a year ago. Current expenditure registered a proceeds from revenues, the overall deficit in small decline vis-à-vis the budgeted amount— FY2013 remained unchanged from last year’s despite a 0.7 percent of GDP increase in the budget target of 5.4 percent of GDP. This subsidy bill—on account of major reductions in represents a 0.6 percent of GDP improvement plan spending on rural development (0.2 percent over the FY2012 outturn and a 1.4 percent of of GDP), health, schooling, and power. In GDP reduction from the peak deficit in of 6.8 addition, public investment declined to less than percent of GDP in FY2010. However, the deficit 1.7 percent of GDP, 0.3 percent of GDP below remains well above the 3.7 percent of GDP budget and 0.1 percent of GDP below last year’s average recorded in FY2005-FY2008, following outturn. the adoption of the Fiscal Responsibility 5 India Development Update April 2013 The central government’s pace of fiscal Fiscal consolidation among the states, on the consolidation continues to lag behind the 13th other hand, remains mostly on track. The Finance Commission (FC) targets. The report combined fiscal deficit of all states declined to of the 13th FC, released in December 2009, 2.3 percent of GDP during FY2012 from 2.9 provided a roadmap for fiscal consolidation for percent of GDP during the preceding two years. the FY2010-FY2015 period. However, the pace This improvement in the states’ fiscal condition of fiscal adjustment has lagged the FC was due to an increase in tax revenue— recommendations since FY2011. Following a particularly own tax revenues—in spite of an 0.9 percent of GDP slippage in FY2012, this increase in current expenditures. States’ own tax fiscal year’s deficit exceeded the FC target by revenue increased from an average of 5.8 1.0 percent of GDP. While the Finance Minister percent of GDP between FY2010 and FY2011 to indicated his commitment to bringing the deficit 6.1 percent of the GDP in FY2012. The states— down to 3.0 percent of GDP by FY2017, this barring a brief deviation after the global benchmark would be achieved a full three years financial crisis—on aggregate have been able to behind the FC target. achieve the targets set by the FCs since the implementation of individual state fiscal Box 1: Expansionary Fiscal Consolidation Challenging Keynes’ original views on the role of fiscal policy, a number of authors have proposed that fiscal consolidation can increase output while simultaneously stabilizing public debt. The scope for such “expansionary consolidations� was first explored by Giavazzi and Pagano (1990) using empirical evidence from Denmark and Ireland in the 1980s. They found that fiscal consolidation could generate expectations of a permanent increase in private income and thereby stimulate today’s private demand and output. More recently, Alesina and Ardagna (2010) identified episodes of fiscal consolidation during 1970-2007 as a decline in the cyclically adjusted primary balance and found that spending cuts, in several episodes, have been associated with economic expansions. Alesina et al (2012) also show that these results are robust to alternative ways of identifying episodes of fiscal adjustments. The success of any expansionary consolidation depends crucially on the type of consolidation. According to Alesina and Ardagna (2010), reduction in government spending is much less likely to be reversed and therefore has a positive wealth effect on individuals, via a reduction in future taxation, which in turn induces an expansionary effect on consumption. In fact, the authors found that in the case of successful fiscal adjustments about 70 percent of the adjustment came from spending cuts and in the case of expansionary adjustment almost 60 percent. Instead, in the case of unsuccessful and contractionary adjustments, more than 60 percent of the budget correction was on the tax side. Spending cuts are usually considered more credible—reducing risk premiums on long-term interest rates and boosting confidence. Therefore, spending cuts can have a positive effect on private investments, while tax increases can hurt investments through the labor market and firm profitability, as shown in Alesina et al (2002). The IMF (2010) also suggests that central banks may view spending-based deficit cuts more favorably, possibly because they interpret them as a signal of stronger commitment to fiscal discipline and are therefore more willing to provide monetary stimulus. Complementary policies play a key role in increasing the likelihood of a positive effect of fiscal consolidation on output. Accompanying policies such as liberalization of goods and labor markets can limit the potential negative effects of consolidation on output and improve the likelihood of expansionary consolidation. For instance, income policies (such as wage agreements) can reinforce the effects of fiscal adjustments that slow down the growth of public sector wages. Alesina and Ardagna (2012) and Perotti (2012) find that such wage moderation, generated through supply side reforms, can more than compensate for the small recessionary effects of spending cuts on the demand side. The IMF (2010) also highlights the impact of a fiscal tightening on net exports, with a considerably larger improvement in exports under spending-based measures but a larger decline in imports during tax-based adjustments. However, since exports cannot increase everywhere, simultaneous consolidations are likely to be more challenging. 6 India Development Update April 2013 legislations in FY2005. According to the Thirteenth FC targets, the states’ aggregate fiscal deficit-to-GDP ratio should decline to 2.5 percent in FY2012 and FY2013. According to the states’ budget estimates, the fiscal deficit during FY2013 is budgeted at 2.1 percent of GDP, as own tax revenues are expected to increase by 0.3 percent of GDP during the year. The strong downward trend in the central government’s debt-to-GDP ratio has mostly lost momentum. The ratio of central government’s debt-to-GDP fell by more than 10 percentage points in the second half of the Phased deregulation of petroleum prices is 2000s, following the adoption of the Fiscal expected to help control the central Responsibility and Budget Management Act in government’s fuel subsidy costs. During 2003. The decline in the debt ratio, however, FY2013, the government imposed a cap of 9 was driven mostly by rapid GDP growth and, in cylinders per year on the sale of subsidized LPG the later period, very low real interest rates and later authorized oil marketing companies rather than fiscal consolidation per se, as the (OMCs) to raise diesel prices by Rs. 0.50 per authorities were able to achieve a (modest) fiscal litre per month till their losses are covered. By surplus in just two years during the past decade. March 2013, state-owned OMCs were incurring In particular, the acceleration in growth in under-recoveries of 8.64 per litre on diesel and FY2006-FY2008 was responsible for most of Rs.439 per cylinder on LPG. Since nearly 60 the decline in the debt-to-GDP ratio between percent of the OMCs’ under-recoveries are FY2003 and FY2013. Even though real interest funded by the government, the phased rates remained low in the last two fiscal years, deregulation is expected to help reduce the nominal growth slowed substantially, and the central government’s fuel subsidy bill, estimated decline in the debt-to-GDP ratio came to a halt. at 1 percent of GDP in FY2013. In FY2012, the central government’s internal liabilities rose for the first time in seven years, reaching 48.1 percent of GDP. 5 Moreover, debt 2. Outlook is expected to remain at about the same level (as The economy is likely to expand by 5.0 a share of GDP) in the current fiscal year and, percent in FY2013. Although the slowing had inflation not remained elevated, the debt momentum of economic growth may have ratio could have risen further, as the contribution bottomed out in the third quarter of FY2013, of real growth to the decline in debt diminished even a substantial pickup in the last quarter of substantially relative to earlier years. Similarly, the fiscal year is unlikely to lift the growth rate the ratio of the central government’s internal of real GDP at factor cost much beyond 5.0 liabilities to GDP, which declined from 60 percent given the weakness observed over the percent of GDP in FY2005 to 48.5 percent in previous three quarters. A minor increase in the FY2010, remained at 48.3 percent in FY2013. growth rate of the trend-cycle component of Following these trends, the general GDP in the third quarter and a slight government’s debt-to-GDP ratio is expected to improvement in export performance in January remain about the same as last year, at nearly 68 and February give some reason for optimism percent of GDP. that economic activity may be finally turning the corner. Together with a modest improvement in investment and some strengthening in the global 5 Internal liabilities include internal debt (market economic activity, signs point to a gradual loans, treasury bills) and other liabilities (such as recovery in growth ahead. small savings and reserve funds, etc.). 7 India Development Update April 2013 term. However, to the extent that these reforms improve allocative efficiency and reduce the fiscal burden, the long-term effect on inflation is likely to be positive. The recent momentum of high price growth makes it unlikely that average WPI inflation would fall below 7.3 percent in FY2013; however, price growth is expected to fall below 7 percent in FY2014 and slow further to 6.3 percent in FY2015. Fiscal deficits are likely to decline as the authorities have renewed their commitment to fiscal consolidation. Following notable fiscal Growth is expected to strengthen in the slippages in previous years, the authorities medium term as global conditions improve delivered on their commitment to keep the and domestic activity picks up. The improving FY2013 central government deficit within the global environment—reflected in strengthening revised target of 5.3 percent of GDP. Even if industrial production and trade numbers— divestment revenues in FY2014 fall short of should help buttress India’s export performance. expectation, the authorities are likely to be able Continued strong inflows of FDI should also to meet the deficit target of 4.8 percent of GDP support investment growth. However, given the with expenditure compression and a recovery in slow pace of global recovery, India’s growth tax revenues as economic activity picks up (Box drivers will increasingly have to come from 2). With states’ fiscal performance roughly on domestic sources. The authorities’ commitment target with the adjustment path recommended by to fiscal discipline may give the RBI more room the 13th Finance Commission, the general for accommodative monetary policy, while a government deficit is likely to decline to just series of investor-friendly measures announced above 7 percent of GDP in FY2014 and fall in the FY2014 budget will provide additional further to around 6.6 percent of GDP in FY2015. incentives for increased investment. Thus, under Roll out of the National Food Security Bill a benign global scenario and with continued could put pressure on expenditure targets. progress on the domestic reform agenda, growth The National Food Security Bill (NFSB), is expected to improve to 6.1 percent in FY2014 cleared by the cabinet on March 19 2013, and and accelerate further to 6.7 percent in FY2015. expected to be tabled in the parliament during Inflationary pressures are expected to this budget session, is designed to provide five moderate. Despite the surprise uptick in kilograms of subsidized food grains per month wholesale price inflation in February and the to 75 percent of the rural and 50 percent of the pressure from food prices keeping consumer urban population. Using the average all-India inflation persistently high, inflationary price of wheat and rice during FY2013, the momentum is expected to wane over the coming estimated total cost of providing subsidized months. The RBI has remained staunch on grains to the NFSB target population could inflation and is unlikely to lower rates range from Rs.890 billion to Rs.1 trillion (0.9 prematurely or be very aggressive with rate cuts. percent to 1.1 percent of GDP). This amount is The stabilization of the rupee following a bout likely to differ from the incremental cost of the of depreciation in the first half of calendar 2012 NFSB, as the provision of some of the grains is also likely to limit inflationary pressures. under NFSB may overlap with existing Good rainfall in the spring and another solid initiatives under public food distribution system wheat harvest should help alleviate some push (PDS). In order to finance the initial stages of factors on food prices, although recent steps to the NFSB implementation, the recently curtail fuel subsidies are likely to contribute to presented FY2014 Union Budget included an higher impetus from fuel prices in the short allocation of Rs.100 billion (0.1 percent of GDP) 8 India Development Update April 2013 to cover incremental costs under the bill, over government’s debt-to-GDP ratio has been and above the Rs.800 billion allocated to food increasingly underpinned by high nominal subsidies. growth and low real interest rates. In FY2012, as the deficit remained elevated following the Debt ratios are likely to resume their decline global financial crisis while GDP growth slowed but at a slower rate than before. Since the substantially, the debt-to-GDP ratio of the mid-2000s, the downward trend in the central central government rose for the first time in Box 2: Union Budget FY2014 The FY2014 Union Budget proposed a conservative deficit target for the central government’s fiscal deficit. Using the Government of India definition, the Union Budget expects the overall deficit to decline to 4.8 percent of GDP in FY2014. However, much of the gain is expected to come from higher divestment proceeds. Using the World Bank definition, which discounts divestment revenues, the fiscal deficit is expected to contract only marginally to 5.3 percent of GDP, despite a 0.6 percent of GDP increase in projected revenue and a 0.6 percent of GDP projected decline in subsidy costs. The main items responsible for higher projected spending in FY2014 include higher public investment (0.3 percent of GDP) and increased allocation to rural development (0.2 percent of GDP). Revenue is projected to rise on account of tax surcharges and higher divestment proceeds. Gross tax- GDP ratio is expected to increase to 10.9 percent during FY2014, due mainly to improvements in direct and service tax collections. The budget announced a series of tax steps to improve revenue collection, some of them being one-time measures such as a tax amnesty (“voluntary compliance scheme�) going back to 2007 and new tax surcharges on individuals earning more than Rs.10 million (US$185,000) per year and domestic and foreign companies with income above Rs.100 million (US$1.8 million) per year. The surcharges are set to expire at the end of FY2014 and are expected to increase revenues by 0.1 percent of GDP during the year. Additional resources are expected to be realized from higher import duties and taxes on luxury goods and reduced tax allowances for high-end homes. Finally, privatization proceeds are expected to generate another 0.5 percent of GDP in revenue. Expenditure increases are expected to largely offset the revenue gains. Total expenditure and net lending is budgeted at 14.6 percent of GDP during FY2014, the same as last year’s budget estimates but a 0.5 percent of GDP increase over the FY2013 actual outturn. Expenditure on subsidies is budgeted to decrease to 2 percent of GDP, primarily because petroleum subsidies are expected to fall from 1 percent of GDP in FY2013 to 0.6 percent in FY2014 after the partial deregulation of fuel prices during the past fall and winter. On the other hand, social spending is expected to rise due to an increased allocation to rural development (offsetting the budget cuts in FY2013). Although capital spending is projected to increase by 0.3 percent of GDP relative to this year’s outturn, it will continue to remain small at 2.0 percent of GDP. The budget generated a muted reaction among observers and markets. In the several months preceding the budget, the authorities put forth a series of important reform efforts to boost investment and contain subsidy spending. Against this backdrop, the budget itself introduced just a few investor-friendly measures such as definition clarifications on portfolio vs. direct investment, greater flexibility for institutional investors to participate in derivatives and corporate bond markets, and tax incentives for capital equipment purchases. It was also characterized by increased reliance on revenue measures to limit the fiscal deficit, including new tax surcharges on high earners and increased taxes on luxury goods such as imported cars, motorcycles, and expensive cell phones. Although the budget announced an allocation of Rs.9,000 crore (0.1 percent of GDP) towards compensating states for revenue losses related to the roll-out of the Goods and Services Tax, it did not unveil a specific roadmap for implementation. Similarly, no specific commitments were made regarding the expansion of direct benefit transfers or further reductions in subsidies. Rating agencies reacted favorably to the fiscal consolidation efforts of the budget, but some cautioned that meeting the authorities’ targets may be challenging if economic growth comes in significantly below expectations. 9 India Development Update April 2013 seven years. In FY2013, the central 2013, the momentum of the first three quarters government’s debt-to-GDP is expected to of the current fiscal year is likely to drive the remain around 48 percent of GDP, just 0.1 current account deficit above 5 percent of GDP percent of GDP lower than last year, and decline for the entire FY2013, exceeding last year’ gradually over the next few years. Even if real outturn. However, the previous section argued interest rates rise, a recovery in growth and that this record widening of the current account continued commitment to fiscal discipline are deficit has been driven primarily by strong expected to offset any potential adverse effects imports flows and stagnant exports, both of on debt sustainability and contribute to a decline which appear to be turning around. As trade is in central government’s debt to 47 percent of picking up around the world, India’s exports GDP by FY2015. However, the pace of decline growth is improving and is expected to continue is expected to be much slower than before as the doing so. On the other hand, imports growth is central government remains off the adjustment expected to be less strong. In particular, imports path recommended by the 13th Finance of gold—which already declined to 10.4 percent Commission and growth recovers to its high of merchandise imports in Q1-Q3 FY2013 from long-term potential only gradually. Following a 11.4 percent in the same period of last fiscal similar trajectory, general government debt is year—are likely to come down further as gold’s expected to decline to 65.9 percent of GDP in attractiveness as an inflation hedge declines with FY2015 from an estimated 67.9 percent outturn the expected deceleration in inflation and the in FY2013. The baseline is subject to increase of gold import duties in January further considerable uncertainty and a worst-case constrains demand. With an expected pick-up in scenario of negative shocks to growth, inflation, economic activity in the major destinations for and the exchange rate in each year of the Indian migrants, remittance growth is likely to forecast period could push the central accelerate, providing further support to the government debt ratio as high as 67 percent of current account. Under this scenario, the current GDP.6 account deficit is expected to improve to 4.5 percent of GDP in FY2014 and come down further to 4.1 percent in FY2015. The near-term outlook is subject to important downside risks. Global industrial activity continues to strengthen after the slump in the second half of 2012. The incipient recovery— having been led thus far by developing countries—is supported by signs of gradual improvement and accelerating activity in the US. On the other hand, business sentiment remains weak in Europe and the latest readings from large developing countries suggest the pace of improvement may be decelerating. Adverse The current account deficit is likely to widen shocks to the global recovery could have further this year but is expected to narrow in substantial negative implications for India as the medium term. Despite the modest multiple vulnerabilities—record current account improvement in the trade balance in Jan-Feb deficit, high fiscal deficit, and persistent inflation—limit the room for policy response. 6 Increased reliance on portfolio investment and The worst case scenario gives a (roughly) two NRI deposits to finance the current account gap standard deviation shock (corresponding to the 97.5 th could put pressure on the balance of payments as percentile of the normal distribution) to real GDP these flows tend to be more volatile than FDI. growth, inflation, and the nominal exchange rate in each year of the forecast period. The distribution of While S&P and Fitch have reacted favorably to shocks is drawn from recent history. the authorities’ fiscal consolidation measures 10 India Development Update April 2013 and recent reform efforts, both agencies have Combined, these effects are likely to form the thus far maintained a negative outlook to India’s foundations of India’s strong growth for decades investment-grade credit rating over concerns to come. related to a slowdown in economic growth. On the other hand, Moody’s—the agency which has Education and demographic dynamics favor published the most recent credit opinion on high growth over the long term India—has reaffirmed a stable outlook on Average years of education by age cohort India’s sovereign debt on the basis of robust 15 to 19 savings rates and private sector dynamism. In 20 to 24 25 to 29 this regard, continued progress on the domestic 30 to 34 35 to 39 reform agenda to encourage investment and 40 to 44 unlock supply constraints while adhering to 45 to 49 50 to 54 fiscal consolidation is critical to supporting 55 to 59 60 to 64 growth and lowering macro vulnerabilities. 65 to 69 70 to 74 75 to 79 Over the long term, India’s prospects remain 80 to 84 85 to 90 very bright. Notwithstanding the current 90 and above slowdown in economic growth, India’s long- 8 6 4 2 term prospects remain highly favorable. India possesses the fundamentals to grow at sustained Male and Female Population by Age, 2009-10 90 and above high rates over the next several decades on the 85 to 90 80 to 84 strengths of its demographic transition, high 75 to 79 70 to 74 65 to 69 savings and investment rates, rising educational 60 to 64 55 to 59 attainments, and increasing agglomeration 50 to 54 45 to 49 effects (urbanization and growth of secondary 40 to 44 35 to 39 30 to 34 cities). India is entering demographic transition 25 to 29 20 to 24 much later than many other developing 15 to 19 10 to 14 5 to 9 countries, and will still be a relatively young Under 5 nation twenty years from now even as its 60 50 40 30 20 Millions 20 30 40 50 60 dependency ratio declines to 49 percent in 2030 Males Females Source: NSS 66th Round. from 56 percent today.7 Even as economic activity fell to a decade-low pace this year, Male and Female Projected Population by Age, 2030 90 and above investment rates did not decline much below 30 85 to 90 80 to 84 percent; combined with the demographic 75 to 79 70 to 74 dynamics and a rising age-savings profile, India 65 to 69 60 to 64 55 to 59 is likely to generate significant volumes of 50 to 54 45 to 49 savings and investment over the coming years. 40 to 44 35 to 39 30 to 34 The average schooling of the working age 25 to 29 20 to 24 population will increase by at least a full year 15 to 19 10 to 14 even with no further improvements in the 5 to 9 Under 5 educational attainment of today’s youth (i.e., 60 50 40 30 20 Millions 20 30 40 50 60 simply due to the fact that younger cohorts are Males Females Source: NSS 66th Round & UN Population division. better educated) and could rise much faster if further progress is achieved on the education agenda. The proportion of population living in urban areas is expected to rise to 40 percent in 3. India in the Global Context 2030 from around 30 percent today, reinforcing Global growth slowed significantly since 2010 productivity-boosting agglomeration effects. compared to the heady pre-2007 economic crisis years. The debt crisis in the euro area, 7 United Nations, 2011. Working-age population is fiscal difficulties in the United States, and the defined as being between the ages of 15 and 64 years. 11 India Development Update April 2013 after-effects of the tsunami in Japan, among and 2012, eliminating the contagion effects on other factors, caused GDP growth in high developing countries. This scenario assumes income countries to slow from 2.9 percent in that growth in the high income countries remains 2010 to 1.6 percent in 2011, and to 1.3 percent relatively robust and stable at about 3 percent in 2012 (World Bank 2013). 8,9 Largely as a between 2011 and 2012 instead of slipping to result of the crisis emanating from high income 1.3 percent as it did in 2012 with the countries and consequent deterioration in intensification of the euro area debt crisis. One financial market conditions and slower growth side effect of this is the negative shocks to of global trade (world trade growth halved from business investment and confidence that had 13 percent in 2010 to 6.2 percent in 2011, before been the case at the time are largely eliminated. slipping to 3.5 percent in 2012), GDP growth in Rather, the simulations assume that household developing countries slowed from 7.4 percent in and business spending are on average about 2.0 2010 to 5.9 percent in 2011, and further to 5.1 percent and 1.0 percent higher (relative to percent in 2012. The Indian economy was baselines) in the G3 economies (which account adversely affected by these global economic for three-quarters of high income countries’ events mainly through a sharp drop in demand output) during 2011 and 2012, with small for its exports, as private capital inflows have positive confidence spillovers to other developed remained relatively resilient during this period, and developing countries. and negative impacts on consumer and business confidence. However, India’s economic Simulations show that the worsening external performance was also adversely affected by environment explains only a small part of the domestic factors. observed slowdown in India’s GDP growth. In the backward-looking scenario of the This section explores the importance of global previous paragraph, higher consumer spending factors in the observed slowdown in India’s in the United States, the euro area, and Japan, growth and the expected recovery. The and positive demand spillovers to other high analysis draws upon the World Bank’s global income and developing countries support an macro model, developed by the Development expansion of India’s real exports by 4.6 percent Prospects Group, which covers some 150 compared with the baseline in FY2013. Imports economies and includes detailed trade linkages are also higher in the benign scenario reflecting between each of these economies. It provides a India’s higher GDP and consumption growth, rigorous and consistent structure for forecasting, increasing by 3.2 percent relative to baseline. and allows for the analysis of the implications of Domestic consumption and fixed investment are alternative global scenarios and policy 0.5 percent and 0.6 percent higher in FY2013 developments. The global model allows for due partly to the boost in external demand, but transmission of global trade, commodity price, also from absence of negative global shocks for and financial market shocks across countries. consumer and business confidence and For instance, in the benign global scenarios spending. Overall, simulations show that India’s modeled below, the positive effects from higher real GDP growth would have been about 0.3 trade flows and of improved consumer and percentage points higher in FY2012 and 0.5 business confidence are partly mitigated by a percentage points higher in FY2013 had the rise in internationally commodity prices as contagion effects from the euro area crisis been global demand rebounds. sterilized. Compared to other developing countries where GDP would have been on In a backward-looking scenario, growth in average 1.6 percent higher by 2012 in this high income countries does not slow in 2011 scenario, the impacts of the adverse external environment on India are smaller, reflecting a 8 smaller share of exports in GDP. World Bank (2013). 9 GDP growth of the G3 economies slowed from 2.6 Faster recovery in high-income countries percent in 2010 to 1.3 percent in 2011, and to 1.2 could help India’s growth but would not be percent in 2012. 12 India Development Update April 2013 by itself sufficient for a return to the record pace of the late-2000s. If the recovery in the global economy were to prove stronger than expected due, for example, to quicker resolution of political gridlocks in the US and the euro area, growth in high-income economies could rise by about one percentage point above the baseline of around 2 percent per year in 2014 and 2015. In such a scenario, the increase in consumption and investment demand in high- income countries and positive demand spillovers to developing countries would raise global import demand by 5.5 percent in 2014 and 2015. India’s exports would rise on average by 4.5 percent relative to the baseline in FY2015 and 4. Financing Progress to Universal FY2016 and real GDP growth could accelerate Health Coverage‡ by 0.4-0.5 percentage points in FY2014 and FY2015 and 0.2 percentage points in FY2016. If “Health for all and education for all remain our these favorable developments are accompanied priorities� - Minister of Finance P. Chidambaram, FY2013-14 budget speech by positive spillovers to investor and consumer sentiment and an easing in financing constraints Health spending in India is low by for firms globally, India’s GDP could accelerate international standards. India has traditionally by another 0.1 percentage points relative to the been a low spender on health care, allocating baseline. approximately 4.1 percent of GDP or US$40 per A reduction in global fuel prices could have capita in 2008-09.10 Public spending on health similar positive impacts on output growth. has varied little over the last two decades, The positive impacts of an improved outlook for hovering at about 1 percent of GDP. the high-income countries on growth in India are Government (central, state and local) is the tempered somewhat by a concurrent increase in source of about one-fifth of spending while out- world commodity prices in response to stronger of-pocket payments represent about 70 percent – global demand. In order to quantify the one of the highest percentages in the world.11 importance of fuel prices on growth, this India is also significantly below its global paragraph considers the impact of a 20 percent ‡ fall in international crude oil prices (relative to This section is based on two recent World Bank baseline projections for 2013) on India’s growth. publications. The first is a comprehensive and Taking into account the positive impacts of such systematic review of all major GSHISs operating in a shock on global growth, simulations show that India (La Forgia and Nagpal 2012) recently undertaken by the World Bank in response to a this would boost India’s GDP levels by about request from the Ministry of Health and Family 0.5 percent compared to the baseline. Given the Welfare (MOHFW) to assess GSHISs in terms of nature of the shock, impacts on growth will be their organizational design features, spending, limited to FY2014, when GDP growth impacts, challenges and potential for contributing to accelerates to 6.7 percent from 6.1 percent in the the achievement of universal coverage. The second is baseline. In this scenario, GDP increases due to a working paper on India (Nagpal 2013) forming part a boost in domestic incomes and spending power of a series of 25 country cases published by the (domestic consumption, investment and imports World Bank under its Universal Coverage (UNICO) rise by 1.9 percent, 1.5 percent and 3.8 percent program. 10 in FY2014) as well as stronger export growth MOHFW, 2009 (provisional estimations from 2005-06 to 2008-09). resulting from a positive impact on real 11 Among Asian countries, this was exceeded only by consumption in the rest of the world. Pakistan, Cambodia, Myanmar and Afghanistan in 2008 (World Health Statistics 2010). 13 India Development Update April 2013 comparators in terms of public expenditure on India’s public health spending remains low: health as a share of GDP among countries with historically… similar levels of income. Using data from 1990– Public health spending, per cent of GDP 2012, the estimated elasticity of general nominal 1.2 government health spending to GDP in India was about 0.99. This is low when compared to 1.0 other low- and lower-middle income countries in which the average elasticity is usually in the 0.8 vicinity of 1.15. The below average elasticity is driven by a generally slower rate of state health 0.6 Central Government spending growth relative to GDP growth. The State Governments 0.4 elasticity of aggregate state health spending to Total growth is only about 0.94, whereas the elasticity 0.2 of central health spending to GDP is commensurate with the average for low- and 0.0 lower-middle income countries. 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 India also lags in health impacts achieved … relative to its income … from its spending. When compared to the country’s level of income and total health spending per capita, India has not performed as well as its income comparators on lowering maternal mortality and performance is just about average for infant mortality (World Bank, 2010). Large disparities in health outcomes are still evident across states and social groups and improvements have not been shared equally. Public subsidies for health disproportionately favor the richer segments of society (Mahal et al, 2004). Peters et al. (2002) estimated that in the late 1990s, for every Rs. 1 spent on the poorest income quintile, the government spent an estimated Rs. 3 on the richest quintile. These … and comparator countries financing challenges are compounded by Public Health Expenditure and Income per capita entrenched accountability issues in the public (2010) 15 delivery system. Public Health Expenditure (% of GDP) Health finance and delivery in India 10 developed along four main and mostly parallel lines.12 The first, and by far the largest, is out-of-pocket spending by households. Nearly Bhutan 5 all this spending is directed to fee-for-service Maldives Nepal India Sri Lanka private providers, but some are for user fees Afghanistan BangladeshPakistan 0 collected at public facilities. This method of 500 1000 10000 25000 50000 finance places considerable financial burden on GDP per capita (USD Current) X-axis in log scale poor households, and is seen as one of the important reasons for impoverishment in India. 12 This segmentation of finance and delivery has been observed in other low- and middle-income countries (Londoño and Frank, 1997; La Forgia, 2000; Baeza and Packard, 2006). 14 India Development Update April 2013 Health outcomes underperform disparities across various dimensions of Global Comparisons of Maternal Mortality Relative to Income and Spending, 2005 vulnerability. The third segment consists of social insurance schemes for formal private Afghanistan sector workers and government employees (4.1 Worse than average Maldives percent of spending). These schemes are Bhutan generally mandatory and most are financed Nepal India through employee and employer contributions via a payroll tax, but also benefit from partial Better than average Bangladesh Pakistan government subsidies. The fourth segment is voluntary private insurance (PHI) which Sri Lanka emerged in the late 1980s but has grown rapidly Better than average Worse than average Performance relative to income per capita in the 2000s. In 2004-05, PHI accounted for 1.6 Source: World Development Indicators, WHO, & Royal Monetary Authority, 2009 Note: both axes log scale percent of total health expenditure, but reached an estimated 3 percent by 2008-09.14 Global Comparisons of Infant Mortality versus Income and Total Health Spending, 2008 The central and state governments have introduced several new initiatives to address Better than average Worse than average Afghanistan existing challenges and improve the Maldives availability of and access to health services, Bhutan particularly for the poor and vulnerable. India Pakistan These include two programs predominantly financed by the central government—the Nepal Bangladesh Sri Lanka already-mentioned NRHM and the Rashtriya Swasthya Bima Yojana (RSBY) of the Ministry Better than average Worse than average of Labor and Employment—and state programs Performance relative to income such as the Rajiv Aarogyasri scheme in Andhra Pradesh15 as well as similar programs launched in several other states more recently. These As much as 80 percent of outpatient and 60 programs were designed and implemented by percent of inpatient care is provided by private various institutions almost in parallel, over a practitioners (NSSO, 60th round data13). This similar time period, and used different financing translates into a flow of 77 percent of total and delivery approaches. However, they all aim health spending directed towards private to extend health coverage and improved providers (including charitable and other non- financial protection for the poor and other profit facilities). The second is tax-financed, vulnerable groups in the country, are fully direct public delivery (20 percent of total health subsidized by the government and, to the extent spending) which in principle is available for all of their benefits packages, they are ‘cashless’ of India’s population. Operated mainly by the requiring beneficiaries to make any States, the public delivery system, which includes the centrally sponsored activities funded under the National Rural Health Mission 14 La Forgia and Nagpal 2012. (NRHM) of the Ministry of Health and Family 15 Rajiv Aarogyasri is discussed in this note as a prototype Welfare, runs facilities at primary, secondary, of a state-financed health insurance program, focused on and tertiary levels, and accounts for between 20 tertiary, often surgical, care. Other programs such as Vajpayee Arogyashree (Karnataka), Chief Minister’s and 40 percent of outpatient and inpatient Comprehensive Health Insurance Scheme (Tamil Nadu), utilization in the country respectively. Comprehensive Health Insurance Scheme (Kerala), Rajeev Considerable inter-state variation exists, Jeevandayee (Maharashtra), Mukhyamantri Amritam especially in inpatient utilization (Mahal, et al., (Gujarat), Megha Health Insurance scheme (Meghalaya), 2001) and there are significant sub-national Mukhya Mantri Swasthya Bima Yojana (Chhatisgarh), and RSBY Plus (Himachal Pradesh) are example of recent programs that have several resemblances to Rajiv 13 MOSPI 2004 Aarogyasri. 15 India Development Update April 2013 contributions, upfront payments to providers or situation prior to its existence. Similarly, the bear a share of the costs of treatment. new government-sponsored health insurance Schemes (GSHISs) introduced a new set of Main Actors and Fund Flows in Indian Health System, circa 2005 arrangements to govern, allocate, and manage Sources Agents Providers the use of public resources for health, including cCentral an explicit (and delivered) package of services, MOHFW* Government (7%) (6%) Public greater accountability for delivering services Providers (20%) External By Volumes, with a focus on results-based payments and (2.3%) State Health Outpatient: 20% State Secretariats** Inpatient: 40% patient choice of public and private providers, (12%) Governments** (13%) S H I and Govt and a bottom-up design to reach universal Social Insurers + Plan Facilities/ Govt Employee Plans Providers (3.5%) coverage by first achieving coverage of the poor. Firms (5.7%) (4.1%) Private The bottom-up design for expansion of health Private Insurers Providers (77%) By Volumes, coverage, starting with coverage of the rural and Households (1.6%) (71%) Outpatient:80% Inpatient: 60% the poorest segments of the population first, and Out-of-pocket payments (69%) the rapid scale-up of population coverage in a a short period of time, are unique facets of the Includes spending by other central ministries and local governments (1% of total spending). contribution of these recent programs to India’s b Refers to utilization volume progress towards universal health coverage. c Includes other government employee schemes such as those in Railways and Defence ministries. d These new initiatives account for an Does not include the new generation of GSHIS increasing share of public health spending. In e The published NHA data contain certain inaccuracies which have resulted in both over and underestimate of 2009–10, the major GSHISs spent an estimated spending. For example, social insurance was placed as a Rs. 58 billion (about 8 percent of total source rather than firms and households. Also, some very government health expenditure). Counting small sources not been depicted in this figure, and therefore private, community, and other insurance the totals for sources do not add to 100 percent. spending in the same year, total spending on Source: National Health Accounts for 2004-05 (MOHFW, 2009) and authors’ estimates based on La Forgia and health insurance accounted for Rs. 160 billion or Nagpal (2012). 6.4 percent of the estimated Rs. 2.5 trillion total health expenditure in 2009–10. The NRHM, by The design of new approaches differs itself, accounts for about 30% of the public substantially from earlier efforts. The NRHM health spending in the country, while the rest is supplements and strengthens the state-owned contributed by state health spending and other public health systems by providing additional central expenditure. resources with a focus on rural areas, primary care and public health programs. The NRHM The reach of new interventions is rapidly also leverages this financial support to facilitate increasing. The NRHM beneficiaries, in theory, the creation of institutional mechanisms that can include anyone walking into a public health enable some degree of financial autonomy and a facility, regardless of income, geography, or faster flow of funds. The NRHM has led to other factors. The country’s rural population of several service delivery innovations and to 833 million (Census 2011), including 490 significant, though still inadequate, increases in million residing in “high focus� states for the central government investments in health, NRHM in particular, are the target beneficiaries especially for public health interventions and of the program. One of the largest components primary care. In addition to significantly in the NRHM is the Janani Suraksha Yojana, a increased financing, the flexibility around hiring conditional cash transfer to poor women who contractual staff, supply chain reforms, use the free institutional maternity services of introduction of a cadre of grassroots workers the NRHM, which is currently utilized by over paid entirely based on performance, innovative 10 million women each year. Over 22 million financial flow mechanisms, and an overall children stand fully immunized each year increased emphasis on public health (NRHM 2012). With the advantages accruing expenditure, distinguish the NRHM from the from several favorable contextual factors that 16 India Development Update April 2013 existed in the country, including the use of a the 12th plan (Planning Commission 2012).17 rapidly growing and highly competitive Significant central investments in NRHM insurance industry to intermediate in the (proposed to be expanded to urban areas too, and provisioning of services, GSHISs have been able rechristened as the National Health Mission) and to scale up rapidly. By 2010, about 240 million Indians were covered by GSHISs, about 19 Population Coverage of GSHISs and percent of the population. Accounting for private Projected Growth (million people) insurance and other forms of coverage, more Scheme 2003–04 2009–10 2015a than 300 million people, or more than 25 percent Central government of the population, had access to some form of Employees State 31 56 72 health insurance in 2010. Insurance Scheme (ESIS) Half of India’s population could have access Central Government 4.3 3 3 to some form of health insurance by 2015. In Health Scheme (CGHS) light of current trends, and assuming continued RSBY — 70 300 political and financial support from government, State government insurance coverage is expected (perhaps Andhra Pradesh, AP — 70 75 conservatively) to reach more than 630 million (Rajiv Aarogyasri) people, 50 percent of the population by 2015. Tamil Nadu, TN — 40 42 Most of the growth is likely to occur along three (Kalaignar) lines: RSBY, commercial insurance, and state- Karnataka, KA — 1.4 33 sponsored schemes. RSBY aims to reach 60 (Vajpayee Arogyashri) million families by 2015 (roughly 300 million KA (Yeshasvini) 1.6 3 3.4 members), and had already reached 34 million Total government – 37.2 243 528.4 families by March 2012. State schemes such as sponsored Vajpayee Arogyashri (VA) in Karnataka have Commercial insurers 15b 55b 90 continued to expand and VA now covers BPL Grand total (includes 55 >300 >630 families throughout the state of Karnataka, while others not listed above)b states such as Gujarat, Maharashtra, Meghalaya Sources: Authors’ elaboration based on scheme data. and Chhattisgarh have already launched new Note: —= not applicable, scheme not yet in existence. state-level programs since the above estimates a. The member base for 2015 is based on La Forgia and were prepared. Other potential drivers of growth Nagpal, 2012 (see that publication’s Annex 3B for key are commercial insurance as well as new state assumptions and methodology). programs that continue to emerge. With b. Estimated based on average premium from Insurance additional states expected to launch schemes that Regulatory and Development Authority (IRDA) sample expand coverage beyond the BPL population, database Traffic Advisory Committee/ Insurance the total membership could well exceed the Information Bureau (TAC/IIB) applied to published projected 630 million16. revenue data of the industry. c. Includes other health protection and health insurance The incremental costs of progressing towards schemes, including community health insurance universal health coverage could range from schemes, publicly subsidized schemes for handloom workers and artisans, noncontributory coverage by 0.4-1.0 percent of GDP by the end of the 12th employers of government (defense, railways, state five-year plan. In order to achieve a long-term governments) and nongovernment employees (where objective of Universal Health Coverage (UHC) employers run their own facilities or provide in the country, the 12th Five Year Plan envisions reimbursements without using insurance mechanisms) as an increase in public health expenditure by about an employment benefit. 1 percent of GDP per year by 2017, the end of 17 The 12th Five Year Plan aims to increase public health 16 Since several states were already planning new schemes expenditure to 2.5 percent of GDP, but including therein when these estimates were prepared, the estimates the expenditure on water and sanitation, which translates presented in the table should be considered conservative. into an increase of this magnitude from current levels. 17 India Development Update April 2013 RSBY form part of the stated strategy of the 0.5 percent of GDP, in two possible scenarios, to plan, and a similar expectation is also made from cover the BPL and the vulnerable non-poor the state level. A recent World Bank publication comprising of 77 percent of the country’s (La Forgia and Nagpal 2012) also proposes, as a population. starting point for wider discussion and debate, a possible pathway to progress toward universal The central government may have less health coverage based on realistic assumptions difficulty securing its share of the required of fiscal capacity, the current configuration of resources. Barring major policy reversals or health financing and delivery arrangements, unforeseen economic downturns, the central lessons and innovations from NRHM and government’s financing share for resourcing GSHISs, and international experience. Table 2, universal coverage ought to be attainable in the reproduced from the publication, estimates the short to medium term. This assessment is based costs of this package to be an additional 0.4 to on the benign economic outlook presented in the Estimated Incremental Costs of the Illustrative Package of Services Proposed Unit cost Number of Scenario 1 Scenario 2 Source of Proposed Intervention and target group per family Scenario beneficiary 500 1,000 financing per year families capitation capitation (Rs.) (million) (Rs. (Rs crores) crores) Standard package (secondary and 1,000a n.a. 60 6,000 6,000 maternity coverage)—BPL Central PHC performance-based primary care 500 (1) 60 3,000 6,000 scheme: BPLb 1,000 (2) Central government total, all Components 9,000 12,000 c Tertiary care top-off scheme- BPL 900 n.a. 60 5,400 5,400 Standard package (secondary and 600e n.a. 120 7,200 7,200 maternity coverage) for vulnerable nonpoord State PHC performance-based primary care 500 (1) 120 6,000 12,000 scheme—vulnerable nonpoor 1,000 (2) Tertiary care scheme: vulnerable 900 n.a. 120 10,800 10,800 nonpoor State governments total costs, all 60 (BPL) 29,400 35,400 Components + 120 (vulnerable non-poor) Total Estimated annual costs: all components for BPL 180 38,400 47,400 and vulnerable nonpoor (77 percent of population) Sources: Authors’ elaboration in La Forgia and Nagpal 2012. Notes: n.a. = not applicable. All figures in nominal terms, estimates for calendar year 2015. a. The price of the secondary and maternity package is estimated at Rs. 500 per family per year at 2010 –11 prices with annual growth of 15 percent in nominal terms. b. These denote additional costs for the performance-based primary care scheme. The primary care package assumes continuation of ongoing financing of services with the proposed performance-based credits being provided in addition. In Scenario 1, the performance-based primary care credit is provided at Rs. 500 per family; in Scenario 2 at Rs. 1,000 per family. c. The price of the tertiary package is estimated at Rs. 450 per family per year at 2010 –11 prices and annual growth of 15 percent in nominal terms. d. Assumes a 40 percent copayment at point of service use by the non-poor, and no upfront premium contribution. e. The cost of secondary and maternity scheme for the vulnerable, nonpoor is estimated at 60 percent of the costs of the BPL package, with a 40 percent copay at point of service. This reduces the costs proportionately (in practice, the cost reduction for the scheme may be higher than 40 percent due to changes in utilization). 18 India Development Update April 2013 previous section, a high elasticity of central and tertiary care, drawing upon their respective health spending relative to GDP, and credible strengths and synergies. There is considerable commitments by the Congress-led United scope, for example, of NRHM-strengthened Progressive Alliance to increasing financing of primary care facilities serving as effective social protection policies. gatekeepers for the secondary and tertiary health insurance programs, and also contributing to Procuring the necessary public financing for effective follow-up care after these patients are universal coverage at the state level could be discharged. Preventive interventions and more challenging. Historically, growth effective case management for non- performance has diverged substantially across communicable diseases at the primary care level states and the elasticity of health spending has can contribute significantly to reducing the need been significantly lower than that of the central for hospitalization, thereby simultaneously government. At current projections, securing the improving quality of life for the beneficiaries requisite financing for universal coverage would and containing the costs of hospitalization require aggregate state health outlays to increase programs. Also, lessons from the demand-side by an estimated 20-25 percent per year in financing schemes in aligning facility-level nominal terms. An increase in outlays of such a incentives for inpatient care can be used to magnitude would require a major reprioritization introduce a performance-based remuneration of the health sector at the state level or system for public facilities providing primary substantial improvements in the efficiency of care. If these programs can be coordinated in current health spending for many of the states. this manner for future expansion plans, their States such as Uttarakhand have significantly current configuration could be a promising increased health spending in recent years and foundation for a reformed health finance and may have an easier time financing universal delivery system. coverage, but Rajasthan and other states may be constrained in their ability to do so. Alternatively, the central government may have to contribute additional funds (beyond the proposed central-financial packages) to the proposed state-financed packages for states unable to generate sufficient funds. If the benefits package is closely coordinated and adequately financed, the expansion of existing programs augurs well for India’s march toward universal health coverage. Despite the apparent dichotomy in financing of these newer UHC programs, as well as the apparent fragmentation among the programs, the potential for an interesting complementarity does exist. The programs discussed earlier have their areas of focus clearly marked out—primary care in the case of the NRHM, secondary care in the case of RSBY, and tertiary care in the case of Rajiv Aarogyasri and other state health insurance schemes. Thus, if these programs could further evolve to a state of close coordination and similarly defined populations to be covered, and with smooth linkages, they could contribute to more seamless, comprehensive coverage for primary, secondary, 19 India Development Update April 2013 5. References Nagpal, S. (2013). “Expanding Health Coverage for Vulnerable Groups in India�, World Bank, Alesina, A., S. Ardagna, R. Perotti and F. UNICO Studies Series No.13. Schiantarelli (2002). “Fiscal Policy, Profits and Investment," American Economic Review, vol. Perotti R. (2012). “The Austerity Myth: "Growth 92(3), pages 571-589. without Pain?�, forthcoming in Alesina and Giavazzi (eds.) Fiscal Policy after the Great Alesina, A. and S. Ardagna (2010). “Large Recession. University of Chicago Press and Changes in Fiscal Policy: Taxes versus NBER. Spending,� Tax Policy and the Economy, Volume 24, The University of Chicago Press. World Bank (2013), “Global Economic Prospects: Assuring Growth Over the Medium Alesina, A. and S. Ardagna (2012). “The Design Term�, Washington, DC: World Bank. of Fiscal Adjustments,� National Bureau of Economic Research, Working Paper 18423. Alesina, A., C. Favero and F. Giavazzi (2012). “The Output Effect of Fiscal Consolidations,� National Bureau of Economic Research, Working Paper 18336, August 2012. Baeza, C. and T. Packard (2006). “Beyond Survival: Protecting Households from Health Shocks in Latin America�, Washington DC, Stanford University Press. Giavazzi, F.and M. Pagano (1990). "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," National Bureau of Economic Research, Working Paper no. 3372, May 1990. International Monetary Fund (2010), World Economic Outlook, chapter 3. La Forgia, G. (2000). “Health Sector Reform: A Financial-Service Flow Model and the Colombian Case.� In Reforming Pension and Health Care Systems in Latin America: What are the Options? Ed. Maria Cruz-Saco, and Carmelo Mesa-Lago, 225–266. Pittsburgh, PA: University of Pittsburgh Press. La Forgia G. and S. Nagpal (2012). “Government-Sponsored Health Insurance in India. Are you covered?�, World Bank publications. Londoño J. and J. Frenk (1997). “Towards an Innovative Model for Health System Reform in Latin America�, Health Policy 41 (1): 1-36 20 India Development Update April 2013 India: Selected Economic Indicators 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Proj. Proj. Proj. Real Income and Prices (% change) Real GDP (at factor cost) 9.3 6.7 8.6 9.3 6.2 5.0 6.1 6.7 Agriculture 5.8 0.1 0.8 7.9 3.6 1.0 2.0 2.0 Industry 9.7 4.4 9.2 9.2 3.5 3.0 5.2 7.0 Of which : Manufacturing 10.3 4.3 11.3 9.7 2.7 3.0 4.4 7.5 Services 10.3 10.0 10.5 9.8 8.2 6.9 7.4 7.5 Real GDP (at market prices) 9.8 3.9 8.5 10.5 6.3 4.7 6.1 6.7 Prices (average) Wholesale Price Index 4.7 8.1 3.8 9.6 8.9 7.3 6.7 6.3 Consumer Price Index 6.2 9.1 12.4 10.4 8.4 … … … GDP Deflator 5.8 8.7 6.1 8.9 8.3 7.3 6.7 6.3 Consumption, Investment and Savings (% of GDP) Consumption 1/ 68.3 69.9 70.9 69.3 70.7 75.6 74.1 71.9 Public 10.3 10.9 11.9 11.4 11.6 13.8 13.0 12.8 Private 58.0 59.0 59.0 57.9 59.0 61.9 61.2 59.0 Investment 2/ 32.9 32.3 31.7 31.7 30.6 30.5 31.3 32.9 Public 8.0 8.5 8.4 7.8 7.4 6.7 8.0 7.9 Private 24.9 23.8 23.3 24.0 23.2 23.8 23.3 25.0 Gross National Savings 39.8 35.1 36.9 36.1 33.3 29.2 30.3 32.1 Public 5.0 1.0 0.2 2.6 1.3 1.0 4.0 4.4 Private 34.8 34.1 36.7 33.5 32.0 28.2 26.3 27.7 External Sector Total Exports (% change in current US) 26.6 15.0 -5.8 37.5 17.9 -1.9 24.0 24.5 Goods 28.9 13.7 -3.6 37.5 23.6 -4.0 23.4 26.3 Services 22.4 17.3 -9.7 37.5 7.1 2.8 25.2 21.0 Total Imports (% change in current US) 31.6 16.6 -0.1 28.8 24.2 1.3 18.6 19.9 Goods 35.1 19.8 -2.6 26.7 31.1 1.0 19.6 21.2 Services 16.2 1.1 14.4 39.4 -7.3 3.5 12.3 11.2 Current Account Balance (% of GDP) -1.3 -2.3 -2.8 -2.7 -4.2 -5.1 -4.5 -4.1 Foreign Investment (US billion) 43.3 8.3 47.0 37.6 38.6 35.0 44.5 75.0 Direct Investment, net 15.9 22.4 18.0 9.4 22.1 20.0 26.5 40.0 Portfolio Investment, net 27.4 -14.0 29.1 28.2 16.6 15.0 18.0 35.0 Foreign Exchange Reserves (US billion) 3/ 299.2 241.4 254.7 274.3 260.1 214.2 230.9 276.7 General Government Finances (% of GDP) Revenue 4/ 21.0 19.4 18.2 18.6 18.4 18.1 18.5 18.5 Expenditure 26.0 27.8 28.0 27.7 26.6 25.7 25.7 25.1 Deficit 5.0 8.4 9.8 9.1 8.2 7.6 7.2 6.6 Total Debt 74.4 74.9 73.3 67.8 67.6 67.9 67.2 65.9 Domestic 69.7 69.8 68.6 63.3 63.0 63.5 63.2 62.2 External 4.7 5.1 4.7 4.5 4.7 4.4 4.0 3.6 Monetary Sector (% change) Money Supply (M2) 19.3 8.9 18.2 10.0 5.8 13.9 15.2 13.4 Domestic Credit 17.7 23.4 20.2 20.5 17.8 19.5 13.7 11.5 Bank Credit to Government 8.7 42.0 30.7 18.9 19.4 16.1 17.9 15.7 Bank Credit to Commercial Sector 21.1 16.9 15.8 21.3 17.1 21.1 11.7 9.5 Velocity 4.3 4.5 4.3 4.7 5.2 5.1 5.0 5.0 Notes: 1/ Consumption is equal to final consumption expenditure plus valuables 2/ Gross fixed capital formation 3/ Excluding gold, SDR and IMF reserve position 4/ Exlcudes receipts from 3G spectrum auctions Sources: Central Statistics Office, Reserve Bank of India, and World Bank Staff Estimates. 21