Urban Development problem in India - the lack of proper Development Plan

Recently, I had the opportunity to examine the Draft Development Plan released by Maharashtra State Road Development Corporation (MSRDC). The plan is quite badly designed. Yet, what hurt me more was the fact that this plan was developed for Special Planning Area (SPA) which is not developed as much so the development is almost green-field urbanization. And yet, even when we are given a clean slate we make such primary mistakes in planning. I wrote about the shortcomings in an Article in Moneylife.in titled "How can smart cities be built on dumb development plans?"

I have looked at the population, water demand estimation, power demand estimation, waste estimation, transportation planning etc. On every parameter this plan falls short. Have a read and leave comments.

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Idiotic debate on Demonetization

Since the announcement of demonetization we have quite a lot of noise but no analysis. I am on the look out for genuine criticism of the policy.

Semantics of false criticism

There is a lot of criticism of the government's policy. The international criticism is uninformed and disconnected from Indian ground realities. Quite a bit is a shallow analysis of Nigeria, USSR and some other countries which had demonetized previously. Generally, the criticism falls into the following buckets:

1. Demonetization alone will not stop black money: That is not proper criticism. 
1. The government never maintained that it will. 
2. In fact, Finance ministry circular highlights various measures undertaken by the government till date. 
3. Further, the prime minister indicated that this was just the beginning and more announcement will come.
2. Removing 85% of the currency will cause a lot of pain to the people: 
1. Well when you ask the people, most are happy with it. Some are very angry. In a country of 1.2 billion you will have voices. 
2. The prime minister took a smart-phone based app poll which revealed 90% approve of the move. Media quickly jumped up stating the questions are biased. I myself took the poll. The questions were not as biased as media made them out to be. It is a fair poll - you CAN express dissent if you don't like the move.
3. But the fact remains none of the media channels or anyone tried to do a sms-based poll. We can have a poll for Indian Idol or some crazy show, can media people not fashion a proper poll and report if people are indeed pro- or against.
4. I tried to go through You-Tube videos about demonetisation uploaded after November 28. I suspected people will give proper reaction once they have been in ATM lines for a few days. I left out videos uploaded by news channels and focussed on videos uploaded by general people. Not many have uploaded but I found one by Roshini Ali & her friend exploring the poor of Kolkata informative. One other fellow explored Mumbai and Aurangabad but he wasn't as comprehensive as Roshini Ali.
3. Economy will be hurt as currency is withdrawn from circulation
1. This is the closest people have come to making rational arguments. I don't mind general public making this argument. But from experts, I expect more.
2. Many experts confuse the measured part of the economy (GDP etc) with unmeasured part (black economy). In an extreme view, since the black economy is not measured its destruction won't affect measured economy. That is flawed as black and white economies intermingle often. Yet they are not quite as intermingled as people make it out to be.
3. A substantial part of the black economy comes from tax evasion. For example, sales without bill are quite rampant in India. Over billing (for cold drinks) is also rampant. These are black transactions. With proper triggers, these transactions will come to the white economy. (Though demonetization is not that trigger).
4. Only time will tell if it works:
1. I understand general public expressing this sentiment. It is a healthy attitude to take.
2. But when experts take this position, I don't like this. I expect the experts to define their goals for the policy - when will they say it worked. 
3. And I want them to state it now not once results are out. Because once data is available the narrative will be tailored to the outcome.
4. Further, be realistic as to what can be achieved by demonetization. I don't want people setting targets "I want black money to become zero".
5. I want to see the goal post that is set out by all these experts.
5. Bull-shit interviews/feedback:
1. Many interviews of government officials and supporters of policy are quite brash. The interviewer does not want to know the policy but instead he wants to hammer the expert. Karan Thaper did that to Bibek Debroy (who I don't really admire - but he is most lucid in the lengthy Ashok Malik interview).
2. Most media reporting is negative and most general people reporting is positive. One TV channel interviewed a Hindi Speaking shopkeeper in Chennai.
3. If I watch TV channels interviews then I get different pictures. Pro-government channels say good things and anti-government channels always highlight bad things.
4. Some channels have shown non-working ATMs quite a few times. And others have shown longer queues giving impression that the queues are that long all the time. People who are on the ground dont find that many long queues all the time.
5. I have concluded that most of the people do not yet understand what exactly the possible strategy is. None have read the Arthakranti proposal even those who have interviewed the founder Anil Bokil.

Basic framework

Just wanted to clarify one thing here.

Tackling Black money requires a repository of measures. Yes many measures together will help reduce black money. Black money cannot be eliminated completely, it can be reduced drastically.

Demonetisation results in many things out of which one is hurting black money transactions. It freezes the black money transactions and not the assets created out of black money. It also results in other effects - anti-counterfeiting, promoting cash-less transactions etc.

The two are only slightly overlapping. Government hasn't claimed that demonetisation is only aimed at black money. It has correctly stated the what demonetisation can achieve. To confuse the two only shows your ignorance.

Policy Details - possible and others

For interested readers who want to know what is the possible logic behind Government's measures, you can parse some of the links here:

1. Amithabh Kant on CNN (focusses on going cash-less)
2. Anil Bokil on ABPMaza (in Marathi) in Anil Bokil in Hindi
3. Arthakranti Proposal (click here for benefits, benefits to individuals, objections)
4. Bibek Debroy on Demonetisation and other issues
5. Ken Rogoff author of The curse of Cash advises gradual demonetisation of high-value notes.
6. James Henry's article calling for surprise currency recall (from Ken Rogoff)

Setting Goalposts

It is important to set out clear goals when we announce the success of a measure. My goalpost is thus:

1. I want to evaluate current demonetisation on following parameters:
1. Total amount deposited with banks / total currency in circulation: I suspect we will get close to entire currency in circulation back into the bank accounts/exchanged. This is because I suspect counterfeit currency in the system is to the tune of 40% i.e. ~ Rs. 6 Trillion making total currency in circulation at ~Rs. 20Trillion.
2. GDP in Q3 and Q4 of FY 2017 should not reduce more than 1.5%. Thus I expect Q3 and Q4 to be at least 5.8%
3. Net bank deposits gain: After stabilization, i.e. say by Sep 2017, bank deposits should appreciate by at least 40% of currency in circulation i.e. Rs. 6 Trillion. This is figure after deposits and withdrawals have stabilized.
4. Share of E-transactions: As per Mastercard data 2% of transactions (number) are cash-less. I would like this number to be around 33% ~ 1 of every 3 transactions should be cashless. 
2. With respect to Black Money targeting, there should be a continuous targeting of black money holders and black economy.
3. Tax simplification and rationalization proposal in Union Budget 2017 (which will be in January). I think we should try Banking Transaction Tax once 2 out of 3 transactions are cashless.

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Reforming Indian Agriculture

Agriculture reform is one of the big successes of Gujarat Model the foundation of Narendra Modi's political success. Yet, national agricultural reform is still lagging. In a recent article, Ashok Gulati points this out with reference to fertiliser reform. That gave me some food for thought. So here are my set of key ideas for reforms for Agri-dependant population.

Farmers' problems can be summarised easily. Farmers are not sure of what to sow, the technology and funds to improve productivity are difficult to source and they do not have mechanism to maximise the cash flow from what they reap.

Improve Crop Selection: Use soil health card to determine effective crops for that land. Suggest crop selection every sowing season based on available stock of the crop, area already under cultivation and alternatives. Commodity demand and supply can be managed before sowing stage itself. It allows for less farmer/crop failures. 

1. Give the farmer data on national area under cultivation for current year and past 5/10 years. (say area under paddy cultivation)
2. Also give total stocks of various commodities (available stock of rice with FCI and national rice stock)
3. Give rice national price trends for past 5/10 years. (say rice prices)
4. Also give comparable import prices for that commodity. Create databank for allowing informed decision on grow v/s import for various crops at various land quality levels.
5. Give suggestions of alternate crops 
6. Using these data points let the farmer make an informed decision as to what to plant. 

Land and Asset Reforms: Clear land title implies that farmers can get easy benefits of land ownership and clear share of benefits arising from land. It allows farmers to create collateral for investing into farms. Allow clearer ownership of assets such as vehicles, animals and other agricultural implements. 

Farmer productivity support: Farm productivity improvement techniques are available at various price points. It is not necessary that most technologically advanced solutions are the best. A database of techniques and corresponding funding agencies should be made available to farmers. This is more information dissemination strategy rather than anything else.

Farmer Produce Income Maximisation:

1. Improve farmer availability by focusing on farmer health. This improve farm-labour availability and thus improves earning potential. It also prevents crops failures because of on-availability of labour.
2. A national farm produce market without middlemen should improve incomes for farmers. But it requires produce classification and grading mechanism. It can be done using kits.
3. Make food processing units investment allowing the produce to be processed for easy transportation across distance and time. Thus, pulping, pickling etc. can be one type of produce revenue maximisation. Other could be farm-side cutting and packaging into easy to consume items - say pre-packaged salads made at farm itself. The whole value-chain from consumers to influencers like dieticians and  master-chefs to food factories to farmers should be leveraged.
4. India can leap-frog the agri-produce canning/packaging style processing to directly ready to cook packaging.
5. This activity is more valuable for non-staples like vegetables, fruits etc.

Farmer Income diversification:

1. Augment agricultural income with horticulture, floriculture and other allied agricultural activities. Considering the necessity of creating seepage reservoirs to allow replenishment of land-water, fresh-water based fish, crops etc can be considered. 
2. Involve farmers in agri-support transportation services, food processing services etc. 

Farmer Savings support: Improve reach of banking to rural areas. Problem for farmers is that loan availability is at high cost and savings benefits are at low rates. Even if loans are not made available a secure savings infrastructure needs to be developed for farmers. Jan Dhan is a good first step.

With these, farming should be gaining traction and agriculture can add at least 2 percentage points to India's GDP growth.

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Welfare v/s Austerity - India's issue

Many people including some experts, attribute Indian growth of about 5% to the welfare schemes of the UPA government. Their honest belief is that UPA government's welfare schemes helped alleviate some of the harshness of the global economic slowdown. They also point to Chinese stimulus as something to emulate. Thereby they believe Modi's promised subsidy rationalisation (euphemism for reducing welfare) is not a good idea. I disagree. 

First, there is a difference between global issues and Indian condition. Global economic engines have stalled, while India's remain switched off for want of fuel (investment and clarity in policy making). 

Second, fixing the engines requires fuel which is currently diverted to subsidies. Thus, if there were an ideal subsidy level, current burden is most likely higher than this level. Therefore, naturally, to bring sanity back this will have to be rolled back. 

Finally, what is required is to push-start the engines is additional effort which will eat away more subsidy than generally required. Thus, push-starting this engine will cause subsidy to dip below this ideal levels. The blame for this does not lie with present government but with UPA which killed the engine long time ago.

Fix the engines and Indian engines can hum along for quite a while creating economic growth and surplus necessary to smoothen the income disparity in later years. Acche din aane wale hain!

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Higher Food Prices and Poverty

Dani Rodrik asks if higher food prices mean higher poverty or does it mean higher income for the poor. He points to several articles and essays on this topic (refer notes below).


The issue is complicated. Just as we have expense basket we also have income basket. Agriculture appears in income basket of low-income HH. An increase in food prices, at least those forming part of income basket, should ideally help these low-income HH. However, the reality is different for most countries.

Often, most of price rise is effected at middleman levels (know for sure about India). The reason is typically inadequate market infrastructure for farm goods. Thus in countries where agri-product markets are well evolved, higher food prices tend to seep to the low income HH whereas in other areas they don't. (Some logical assumptions included).

Further, if a certain section of the low-income population is suffering drastically because of food price increases then it is difficult to justify the increase. Urban poor almost always suffer because of any food price increase. However, if urban poor can return to rural areas then it is possible to tweak their income basket to their advantage. This obviously depends on how volatile the price rise is.

The point is, whether the net impact of increasing food prices is beneficial depends on various factors. First, it depends on the profile of income basket and how much of income basket is increasing. Second, it also depends on how effective are agri product markets. Thirdly, it also depends on polarization of income baskets within lower income class.

Notes:

Dani Rodrick 2007 post - Food prices and poverty
Dani Rodrick 2008 post - Food prices and poverty confusion or obfuscation
Johan F.M. Swinnen - The right price of food
Maggie McMillan - Does OECD support for agriculture increase poverty in developing countries?
World Bank Implications of higher global food prices for poverty in low-income countries
World Bank Distributional effects of WTO agricultural reforms in rich and poor countries

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My book "Subverting Capitalism & Democracy" is available on Amazon

Future Without Poverty

World without poverty is one of my dreams! And I fuss over it in lot of ways. My readings of current writers on Poverty suggest that we need a view on life of the poor. This ebook is an attempt to express the same. It is my contribution to understanding and eradication of poverty in the world. Download the ebook here.

Briefly it covers three main aspects:

How poor get poor?


I look at three phases over which a household gets into a poverty trap. This, I believe, is critical to understand as it harbours solutions to the poverty problems. Further, it also leads us to a basic framework for solving the poverty crisis everywhere.

Snakes and Ladders Approach


Getting a community out of poverty needs a customized solution. Each community faces its challenges (snakes) but has opportunities (ladders) hidden within its structure. This framework may be used to build a customized approach for the community.

Structural v/s transient poverty 


One of the central idea I want to highlight is the difference between temporary poverty - one that household can get out of versus structural poverty - one that seduces the household into believing that they can get out of poverty.

I would love to hear your feedback on the ebook. Please email me at rahuldeodhar [at] gmail [dot] com.

The economics of labour market intermediation | vox - Research-based policy analysis and commentary from leading economists

David Autor has a fantastic post on Vox on economics of labour market intermediation. Labour markets are imperfect and they are kept that way by interest of recruiters and employees. In the end both loose but still there is enough weight in status quo.

Let us consider an employer and a prospective employee. There is no way for the employer to know the employees performance in previous organisation. Therefore the metric is salary drawn currently.  Now if, by any chance, an employee accepts a job with lower salary then his salary growth is lower! This appears unfair - but its actually a manifestation of inefficient market at work. The only way this situation corrects is when imperfection on other side - i.e. you have a desperate employer. 

As per my experience the intermediaries actually twist this situation to the benefit of the employer. Hence most of the time employees distrust HR managers and intermediaries. That is the reason salaries are secret. Often even though companies treat everyone fairly - employees still feel distrust.

In sum, there needs to be two areas of research in this. First - does this behaviour actually benefit the employer at all. Second - does this distort the labour markets to an extent that it impacts the economy. My intuitive guess is no on first count and yes on second. 

Links:

The economics of labour market intermediation | vox - Research-based policy analysis and commentary from leading economists.

Development 2.0 is gathering steam

One of the many things Web 2.0 will help streamline is poverty alleviation and development of backward regions of the world. World bank's PSD blog earlier had a post about what this development 2.0 needs. Their recent post hints at a BBC initiative that has potential.

Links:
Development 2.0
A lesson in openness - PSD Blog - World Bank Group

LEssons for Poverty alleviation - The economics of civil strife

Dr. Dani Rodrick points to an article by Oeindrila Dube and Juan Vargas. (Dani Rodrik's weblog: The economics of civil strife). The paper concludes that when prices of labour intensive commodity rise - strife reduces a benefits are wide spread. Whereas when prices of capital intensive commodity rises - strife increases if benefits are concentrated. This has some lessons for poverty alleviation programs.

I am tempted to go to my example of snakes-and ladder model for poverty. Here snakes are poverty creators and ladders are poverty alleviaters. Ladders are typically income related and snakes are expense related.

In the context of ladders, poverty alleviation has two-fold objectives. First is to have ladder-accessibility to all (income growth / economic growth of labour intensive activities). Second is to have more ladders (income generating activities supporting /surrounding the capital intensive sectors)

A quick view on the strife part of paper

In my view, strife actually happens when both the above conditions are negated. Or if income generating opportunities are not available to large scale population while being selectively available to few. AND whatever other income generating opportunities are available are not growing. When oil prices increase in Columbia did not translate into ancillary economic activity then strife is definite.

Solving the Poverty problem

The global elites are debating about eradication of poverty. Let me quickly summarize my view on poverty.

What is poverty problem?
Poverty is not going to go away. At any point in time there will be poor people. The real problem of poverty is that poor people do not have the means to move out of poverty. In other words, this is structural poverty. I have looked at this in my earlier post - “Why certain people stay poor?"

Poverty that will not go away should be transient poverty. Where people fall into poverty because of illness or bad luck etc but have access to resources to help them get back into income generating households.

The solution
The poverty solution will have two main elements. First is identification of threshold for the economy. Second is enabling this segment with tools and resources to move out of poverty cycle.

Poverty and its relation to population under certain threshold income
I have a problem with calculation of this threshold income. Generally, poverty is defined as people earning under a certain threshold income. The threshold income, therefore, is calculated using consumer price indices of various items required for minimum subsistence.
Rather threshold income should be X-sigma deviation from median population. This approach is far more likely to identify target population.

Poverty and relation to people at bottom of income pyramid.
Poverty is not about people being at the bottom of income pyramid. There will always be people at the bottom of the pyramid. The argument is what if the bottom is higher now. I have a problem with this approach as well. If everyone is higher then we have inflation. It means poor people though not poor by definition, continue to get low quality goods. To add to this they are not even defined poor so no reform reaches them.

Why this solution does not work?
Readers will recognize that the solution I have proposed is not new. And experience suggests it does not work. The main reason is lack of other infrastructure.

1. Poverty reduces access to legal protection. Poor people do not have resources (mainly time – as it directly impacts income) to strive for justice. Hence they can be taken for a ride.
2. Poverty increases current or future health-care expenses. As I highlighted earlier, healthcare represents a snake in this snake-and-ladder game of climbing the income pyramid. Rising healthcare cost are sure to keep poor families continuously poor.
3. Poverty reduces probability for higher education thereby creating ceiling for income growth of the household. Thus occasional poverty (in a lifecycle of a family) become sustained or structural poverty.
4. Poor people do not have time to identify best employment opportunities for themselves. They have to go by word of mouth or past skills.

The legal and healthcare related infrastructure can prevent poor household from sinking further. It is a down-side protection. Then you need up-side push. This requires infrastructure like free education, employment exchanges, access to finance for entrepreneurship, technical support for diversification of household income etc.

In sum…
Poverty is recognized to be the bane of the modern economic landscape. But escaping structural poverty is possible.

Legal and healthcare infrastructure is systemic necessity. A lot of work has been done on education for the poor as well. Mobile phone based employment exchange for the poor is technically feasible. Access to capital through micro-finance is well researched. All the pieces of the puzzle are in place. It is just a matter of connecting the dots.

This post is dedicated to Blog Action Day 2008 on Poverty.

Previous posts on poverty:
1) Layout of poverty (Jan 10, 2008)
2) Why certain people stay poor? (Dec 03, 2007)
3) Selling costly products to bottom of pyramid (Nov 08, 2007)
4) How city development impacts poverty - Why Bihar should ensure there are no slums in Mumbai? (Dec 03, 2005)

The layout of poverty

I mentioned in a previous post why certain people stay poor. In the meanwhile, there have been lots of articles on poverty I have highlighted those below as well. Yet, I don't think enough work has been done to classify and understand different types of poverty. I believe the efforts in classification will help devise better solutions to the problem. I do not claim to be an authority on the subject but I am trying my best to think through the issue.

A different poverty - volatility induced poverty
I have highlighted two broad levels of classification i.e. transient and structural. Under structural poverty, we have a type off poverty that arises out of high net-income volatility combined with adequate average income. This kind of poverty is induced by volatility -in gross incomes and in expenses - both on unpredictable time scale (un-seasonal). Day-laborers, artisans etc suffer this kind of poverty more often. Farmers dependant of rain-water also suffer this kind of poverty. Dean Karlan and Sendhil Mullainathan have explored this here.

The unpredictability of expenses leads to in-debtedness. The flow of credit to this sector comes at high costs hence in-debtedness tends to be self-reinforcing - particularly with higher expense volatility. Hence cash-flows are directed towards life-sustenance rather than investments. In other words - expenses for healing, medicine, food, essential tools etc tend to be favored against education, savings etc. Such people find themselves caught in a structural poverty. I suspect healthcare is the most critical expense of the rest. It reduces income and increases expense at the same time! Also healthcare costs tend to be higher as nutrition is not proper. For them snakes-and-ladder game of scaling the income pyramid seems hopelessly crawling with snakes of healthcare costs denying them the ladders of savings and education.

Framework for solution
A first principles approach suggests that anything that reduces volatility (both income or expense) will be of great benefit. We can also easily conclude that smoothening incomes comes first, before smoothening expense is important. Next, it is absolutely essential to reduce expenses - particularly healthcare, food (proper nutrition) and education (for future). Yet most solutions to their problems tend to addressing volume not volatility. These solutions are likely to fail unless they add an element that suppresses volatility.

Income diversification
The growth in rural incomes in India has come from income stream diversification. Farmers have used tractors, pick-ups for transportation thereby leading to stable earnings and alongwith highly volatile agri-income. This resultant reduction in income volatility has set them on path of prosperity.


Expense smoothening Credit?
Simply throwing credit at this kind of poverty problem is not a solution. Credit repayments impose a smooth addition on their volatile expenses making their situation worse. (Hence farmer suicides in India). Indian rural banking is abound with stories of farmers wanting to pay two months installments together when they have money - and not being able to pay even one months installment in distress times. If their loan repayment schedule were to match the income generation schedule they will have much less to worry about.


In sum
Poverty reducing initiatives need to appreciate the differences in poverty. Volatility induced poverty can be tackled by addressing income volatility first, then expense volatility and then quantum of income and expenses. Expenses on healthcare, food and education are critical and need to be reduced.

Must read links:
Innovation for Poverty Action
MIT poverty action lab -
Is microfinance too rigid?
Marshall Jevons highlights course on poverty and some other links
Poverty in pictures -
Does poverty kill PSD blog links to some important conclusions

Why certain people stay poor?

When world embraced capitalism, it embraced, as Milton Friedman puts it, equality of opportunity and freedom of choice. It also embraced, as Karl Marx anticipated,  income inequality and therefore poverty.  Poverty, the product of capitalism, is a real circumstance.  Since capitalism also offers everyone a fair chance to rise above his circumstance and create wealth, there is not much discord with this arrangement. In fact, coupled with an enabling infrastructure provided by a democratic government, this represents one of the fairest civil structures yet created.

So why do some people remain condemned to poverty? To understand this, we need to understand poverty a little bit better.

Transient Poverty Vs Structural Poverty

Poverty, essentially (i.e. theoretically), is transient. In a stable, fair capitalist economy, there is a certain amount of population that always remains at the bottom - below the poverty threshold - of the income pyramid. By labour and enterprise, this population rises to the next income class. Simultaneously, competitive pressures force certain other people below the poverty threshold. These represent the transient poor. These people are currently poor but by no means restrained by their current poverty against rising through the income pyramid.

Then are there people who by currently being poor are condemned to be poor for their entire life, and even those of generations to follow? Sadly yes, and quite a few of them at that.

Dynamics of Poverty - Scaling up the Income pyramid

The income pyramid represents the basic framework on which the graph of poverty is drawn. The line income of a household will trace over time is determined by, other things remaining same, the age of the household and change in their income.

As mentioned earlier, a typical household has two ways of moving up the income pyramid - labour and enterprise. But a household below the poverty threshold, has only one way out - hard labour! This household does not have savings or income surplus or any access to finance (they are sub-prime!) to kick-start any enterprise. Even now, a household would not have a problem if labour opportunities are assured. Here is where the cusp of the problem lies. Labour does not always help this household scale the income pyramid.

The biggest hurdle - poverty!

Labour demand of an economy shifts every year across sectors. A very distinct shift is noticeable in farm labour's shift into industrial labour. Within this drastic shift there are micro-shifts moving between sectors from metals to plastics, from mechanical to electrical, from plumbing (hydraulics/pneumatics) to instrumentation (switch-gear). This movements create a chasm between available skill and desired skill. This chasm is difficult to cross without investment of time and money. Both of which our poor household does not have. Hence our poor household works twice as hard but does not get added surplus that can springboard it into the next income class.

Springboard for the poor - education and micro-finance!

The only way to help the poor out of this negative spiral is by making their labour ready for the market requirement and giving their enterprise a launch-pad.

Free training and education need to be made available to the poor. Agencies must use proper forecasting techniques and relevant research localised to the area to train the labour making them employable. Example - Locals in an area ear-marked for food processing zone, can trained in repairing, maintaining food grade machinery. Farmers can be trained in operating E-choupal kiosks and accessing mandi prices.

Micro-finance has a distinct role to play in this area. It gives the poor, access to capital to start their enterprise. Please remember micro-finance gives "access to capital". It implies financing "accessories" for the enterprise. And since its capital, return is estimated through study of potential viability  forecast of the enterprise. Thus micro-finance can be a robust springboard.

And the safety net...

We discussed two main levers that give poor households income advantage. But poor households also need a safety net in the form of accessible healthcare and low-cost banking facilities.

Healthcare represents one variable that can reverse income gains very fast. Rising healthcare costs have pushed many a household into the depths of poverty. Hence access to clean and complete healthcare is absolute essential.

Low cost banking is a worthy enabler for the poor helping them keep their assets safe and secure thereby granting small insurance against thefts and burglary etc. It also helps bank create a credit history for the household. This history (knowledge / information) acts as a de-risking element for the household making mainstream banking credit available when required.

Such a minimum safety net would indeed be a great service a nation can do for its poor.

In sum...

Poverty is not always transient. It is a nations responsibility to create adequate anti-poverty infrastructure to help its poor rise the income pyramid. Proper training and Education, accessible micro-finance provide great opportunities for income enhancing ventures to blossom. Adequate safety-nets through clean and accessible healthcare and access to low-cost banking provide critical support to household's growth initiatives.

Selling costly products to the bottom of the pyramid!

When phones, televisions and many other costly products came to Indian villages, they were bought by few and used by many at low (or no) cost. In early days, such wonderful devices did not sell as much as they should have. Is there a way to sell such products well before they become affordable for the masses? Possibly! Let us examine the case of one product that is going through the exact same phase - the massage chair!

The massage chair!
Recently a cinema theatre we frequent put-up OSIM massage chairs. The chair is awesome and a full body massage takes about 20-25 minutes with lot of customizations possible. This massage chair from OSIM represents costly, high maintenance equipment that is not a daily use item. Using it requires a comfortable, private setting where one can enjoy the relaxation from the massage.

Converting product into service – a massage chair “Laundromat”
Imagine “OSIM massage parlours” wherein one gets to use the chair for fixed fee. This concept can be developed similar to Laundromats. Lot of such chairs can be made available in these “parlours” with a personal cubicle.
These parlours need to be placed where:

• People with aching backs and bodies are present i.e. airports, gymnasiums etc.
• People have some time on their hands - malls, cinema theatres, spas and hotels etc.

So this single product can be made into many “services” e.g. a simple massage, aroma massage (with choice of fragrances being sprayed in the cubicle), relaxation lights and sound package etc. The concept also opens up a lot of various options for allowing people to experiment with scented relaxation-candles, special relaxation music etc. The possibilities are enormous. The idea will definitely catch on resulting in product sales the company may not even have imagined! What say?

Why Bihar should ensure there are no slums in Mumbai?

Slums are seen as a great blemish to any urban settlement. Various efforts made to eliminate these are rendered futile.

A slum dweller has substantially reduced cost of living as compared to a legal resident. The total cost of working for a legal resident includes rent for property, facilities like water, electricity telephone, cost of travel etc. There are also long-term expenses for maintenance of the facilities they use. For a slum dweller these cost do not include the major heads of rent and in some cases cost of travel is also reduced. The maintenance is almost as negligible as the rent. Due to these cost advantages the slum dwellers are able to work at much reduced wages as compared to the legal residents. This has cascading implications.

Firstly, this prevents any increase in the cost of labour in the city. Alternatively the labour costs may also reduce. This allows the city to retain its cost advantage over other competing areas. Corporates and revenue contributors do not feel the need to shift base to the newer areas, the newer areas do not get adequate returns on the investments. But as this is only a pseudo‑advantage it actually strains the infrastructure of the city. Investments in the infrastructure generate more jobs and more jobs attract more people. This goes into a degenerating spiral till the area cannot take any more modifications to adapt to the increasing demand.

While superficially it seems that the cost of living of only the lower end of the wage spectrum is affected, a peek at the economic mechanism reveals how this affects the entire range of incomer earners. It reduces the cost of living by making maids, drivers and other services available cheaper than it would have been possible otherwise. In its absence the pinch of increasing costs would have felt earlier creating a trigger for economically rational action.

The political impact of this is even greater. The local legal residents are not able to compete against this new workforce that enters this local markets. This forces the local labour force to move out of their “homeland” leading to “son of soil” movements. The fact that the political parties promoting the “son-of-soil” movements themselves are promoting slum rehabilitation schemes shows the hollowness of the intentions on both grounds.

The major political impact is of the vote-bank politics. The work force that migrates into the city needs a support structure and political leaders exploit this need to gain a hold in the area. The fate of the politician depends upon the number and not their legality (which can often be purchased by politicians themselves). The politicians therefore are in favour of migration into the area rather than out of it. This gives a situation the last push down the spiral out of which recovery is rather impossible.

Rational action assumed as a solution for slums is enforcement of laws against encroachment of private and public places. When this rational action assumed is broken the system fails miserably. The system needs to be redesigned so as to be fail-proof in such circumstances.

Notes and Points
Slums have an effect to lower or maintain the cost of labour in the city. This effect is short term and has a detrimental effect on the investments made in the city in the long term. Over the long term these investments are less profitable than investments in economically viable legal locations.

Artificially decreased cost of living denies the lesser developed areas to get a share in the limited investment capital available. This means Bihar and other lesser developed states should be more keen to eliminate the slums in metros and urban areas than the metros themselves.

Slum problem can be tackled politically or economically or both. Political solution would be to restrict the right to vote to locations where they have a valid house. Economically, taxation could be increased for investments in congested cities and metros. This will make investments in congested cities unviable thus allowing development in towns and cities other than those already congested. However we also need to ensure that there also a pull from other cities for such investments to come through.

There should be a great interest from the central government to make sure that congested cities do not get the investments for the greater good of the economy as a whole. Developmental bias is certain to clarify the same.

Essentially what it means is that if you ensure Law and Order (and not let slums come up in the first place) to allow the economics to shape the development you will have ideal country!! Will India create an atmosphere where Economics is able to efficiently take its course? That is a big question!!!