Specifying the bonds as ‘health bonds’, and not for general use, limits using the proceeds for healthcare only. By Maitreesh Ghatak & Tarun Jain
State governments are on the frontline in the fight against Covid-19. Yet, state finances have been devastated as tax revenue has dried up, and expenditures on health, migrant transportation and economic revival have skyrocketed. As the economy recovers from two months of lockdown, restoring state finances for the long run is a priority. Yet, the process of centralisation of the structure of public finances in India has left the states with limited fiscal power, and the lockdown has dried up revenue from the few fiscal instruments they control.
On May 17, GoI increased states’ limit for FY2020-21 borrowings by 1-2% of state GDP, equivalent to about Rs 4.28 trillion, which despite the conditionalities, offer a window of opportunity. We propose that state governments issue ‘long-duration public health bonds’ of at least 10 years’ — ideally 30 years’ — maturity in domestic capital markets to raise funds specifically for healthcare expenditure, worth 1% of the issuing state’s GDP.
Health is Wealth
Public health investments can generate large economic returns, especially when targeting young children. Consider the 1918 Spanish influenza, perhaps the only comparable event in the last century to the current crisis.
A 2006 study, ‘Is the 1918 Influenza Pandemic Over? Long-Term Effects of In Utero Influenza Exposure in the Post-1940 US Population’ (bit.ly/3eR2NGq), by Douglas Almond showed that babies born to infected mothers in the US were up to 15% less likely to graduate from high school. Infected infant boys had 5-9% lower earnings as adults, suggesting that public health failures can have longterm effects.
In similar vein, large-scale malaria reduction in the 1950s in India generated 2% greater annual income for adult men even 30 years later, plus savings from treatment in public hospitals.
A 2018 study in Kenya, ‘Exploiting Externalities to Estimate the Long-Term Effects of Early Childhood Deworming’ (bit.ly/3gRBXjw), by Owen Ozier shows that deworming pills costing just a few cents per dose had large cognitive effects, comparable to 0.5-0.8 years of schooling, partly by breaking the transmission of vectors from infected to uninfected children.
Another 2016 WHO study, ‘Return on Investment from Childhood Immunisation In Low- And Middle-Income Countries, 2011-20’ (bit.ly/2MpPil9), reported that immunisations yielded a net return about 16 times greater than costs over the decade.
No wonder Bill Gates called immunisation expenditures his ‘“best investment” [which] turned $10 billion into $200 billion worth of economic benefit’. To be sure, not every intervention is equally effective everywhere, and the specific policies will need to be customised. But public health clearly delivers high private and social returns to government spending. The immediate concern to additional government borrowing is potential increases in market interest rates. That short-term perspective takes the supply of loans to be inelastic.
To the extent the loans fund public investments that raise the productive capacity of the population, this will show up in the form of higher income levels and higher tax revenues in the future. If state governments spend on public health now, chances are high that their residents will be healthier and earn more later. State governments can exploit this ‘virtuous cycle’ to tax their more prosperous residents in the future and repay the bonds. In contrast, raising taxes now could potentially act as a hindrance to economic recovery.
Disproportionate Returns
Issuing bonds for 30 years’ duration matches the decades-long returns from investments in healthcare, and is about the time taken for a young child who benefits from health investments to become an active taxpaying adult. Very short-duration bonds mean that the repayment schedule will not match the boosts in tax revenue.
Arguably, GoI could raise the same money at lower cost and then transfer to states. But, recently, GoI held up disbursing states’ share of GST collections at precisely the point that states needed those funds the most. Market borrowing limits by states have been raised subject to administrative conditions, and GoI could possibly impose conditions for health funds as well. Finally, borrowing directly allows each state government to prioritise its unique healthcare expenditure needs.
Specifying the bonds as ‘health bonds’, and not for general use, limits using the proceeds for healthcare only. Even within the healthcare sector, the need for debt repayment ensures that government expenditures focus on the highest returns — typically associated with early childhood and maternal care, communicable diseases and sanitation.
State debt is already traded on capital markets as state development loans (SDLs). The cost of new offerings will be pegged to prevailing yields, implying different cost of capital for different states. State government borrowings benefit from the implicit sovereign guarantee, though still trade at a discount to equivalent maturity central government debt.
The bonds may be attractive to investors looking for higher returns than GoI debt, but at lower risk than corporate bonds. They may boost returns for institutions with statutory constraints to invest only in government securities. In the spirit of impact-investing, the bonds may also be attractive to civic-minded households concerned about India’s public health infrastructure and wish to contribute positively.
The Covid-19 crisis has vividly demonstrated that public health and its economic aspects are closely interrelated, and so must be the policy responses to it. Our proposal of a public health bond is very much in this spirit.
Ghatak is professor of economics, London School of Economics, UK, and Jain is associate professor of economics, Indian Institute of Management, Ahmedabad
Source: indiatimes.com