View: Health can be a way out of the middle-income trap for India

By Andy Mukherjee

Even before the coronavirus, India was at a crossroads. At roughly $2,000 a year, per capita income in 2018 was half of what the country needed to become an upper-middle-income economy. Catching up with advanced nations posed a more daunting challenge.

Should India strive to break free of the middle-income trap by becoming a factory to the world, taking over from China? Or would it be better off prioritizing the domestic economy, expanding its rather narrow base of mass consumption? The answer in the post-pandemic world may support the second strategy, with health infrastructure as its centerpiece.

JPMorgan Chase & Co. economist Jahangir Aziz stirred up a debate late last year when — taking his cue perhaps from the U.S-China trade tensions — he said that the “game is over” for emerging markets that were “addicted to globalization.” India, he argued, refuses to accept that it’s just another developing economy that grew on the back of globalization.

The coronavirus outbreak has only deepened India’s vulnerability. Trade in goods has slowed the world over. Movement of people has halted. Even the dollar, the lingua franca of global commerce, is finding it hard to go where it’s needed. India’s edge in software services will be blunted if swathes of Western industrial capacity get rescued by taxpayers, who will demand that firms stop outsourcing and create jobs at home. Indian startups will struggle to raise money from global private equity firms, which are busy angling for a public bailout of their portfolio companies, as my colleague Shuli Ren has noted.

Then there’s geopolitics. The mistrust between Washington and Beijing has gone up several notches because of the blame game around the pandemic. To the extent the East Asian model of export-led growth requires a wealthy core economy buying cheap widgets from a periphery it hopes to be able to control, it has run its course. There won’t be a next China.

So how should New Delhi navigate this scared new world? In dealing with the virus and its aftermath, the Indian government is bound to shed fiscal restraints, and rely on the central bank to fund its spending.

Once it’s on the gravy train of deficit monetization, neither India nor the rest of the world will want to get off. This won’t matter as long as India can demonstrate that public spending is boosting productive capacity. One way to do that, as a senior financial services executive put to me, was to make public health the engine of a state-funded investment drive.



A highly contagious outbreak can overwhelm even the most sophisticated of medical systems, but as Fitch Solutions says, with 8.5 hospital beds and 8 physicians per 10,000 people, India’s healthcare industry is particularly at risk. By comparison, Japan and South Korea have 120 to 130 beds for 10,000 people. That explains the severity of Prime Minister Narendra Modi’s 21-day shutdown, which has caused enormous hardship for the urban poor and migrant workers.

Modi’s “Make in India” slogan rings hollow when doctors have to don raincoats and helmets in the absence of protective equipment. To say that even the U.S. is short of gear and tests only proves that the flawed American healthcare model need not be followed. The World Bank has fast-tracked a $1 billion loan for India to speed up coronavirus detection and treatment. But the bulk of the future investment in new hospitals and emergency rooms must come from the state. Expensive private medical education paid for with hefty student loans must give way to scaled-up subsidized training. Just reversing the 1:2 ratio of government versus out-of-pocket health spending will unleash purchasing power.



Two decades ago, when India was shaking off the vestiges of its socialist past, 31% of medicine in inpatient treatments was available for free in public hospitals. Now, when market forces rule, the share of free drugs is down to less than 9%. Imagine the anxiety it breeds among the poor who are one mishap away from destitution.

It’s unclear whether the current crisis will prompt the U.S. to drop its deep resistance to a single-payer health system. India, which has no qualms about being a welfare state, could emulate the Korean or Taiwanese model in which a single national insurer, funded by budgetary support as well as taxes on workers and employers, pays service providers and drug companies.

Even Korea took 12 years to achieve 100% coverage. A much larger country like India will need stepped-up public investment to take its fledgling universal healthcare program to all.

As for the rest of the economy, emphasizing domestic demand doesn’t mean import substitution. Nor does it imply unwarranted export pessimism. A long hiatus in globalization won’t preclude opportunities for India to boost its share of world exports.

With a health-centered investment agenda, India can supply doctors, nurses, paramedics, technicians and other medical professionals to the world. It can also supply valuable data and analytics. Even with the country busy fighting the coronavirus, planners need to start thinking of tomorrow’s battles. In India’s case, one of its biggest weaknesses could also be its growth plan.

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