Why I Fear Doctors and Wealth Managers

stethescope

A few years back I had classic symptoms of diabetes and I went to see a doctor. The doctor recommended sixteen blood tests and he was insistent that I carry out the tests at a laboratory of his choice.

At the same time, he gave me two medicines without telling me what exactly they were. When I went to buy them, I figured out that they were anti-depressants. I found it difficult to figure out as to why he had recommended these medicines. I tried to remember the questions he had asked and my answers to them.

One question that he had asked was whether I had any anxiety. I had said yes. I was in the middle of writing a big book and had trouble sleeping on some nights.

I never got around to having the medicines or getting the bloody tests done, and decided to go to another doctor, who started with four blood tests not sixteen and no medicines.

What this doctor and many other doctors make use of is something the economists refer to as asymmetry of information. It essentially refers to a situation in any economic transaction where one party has more information than the other. As Guy Sorman writes in An Optimist’s Diary “Economic actors don’t all have the same information at their disposal.”

So, when we go to a doctor, the doctor clearly has more information or at least is believed to have more information than we have about the human body. Doctors use this asymmetry of information to try and make more money by ordering a battery of tests which are not required. At times, it can mean a longer stay in the hospital than is necessary. Patients typically don’t question this because the belief is that ultimately the doctor knows better.

As K Sujatha Rao, a former bureaucrat who has worked extensively in the health area, writes in Do We Care? — India’s Health System: “Asymmetrical information endows providers with power and authority over the patients who have incomplete information about what ails them. Providers then take advantage of such moments of vulnerability by ordering a battery of tests, unnecessary surgeries, or prescribing high-cost medicines.”

What allows the doctors and the infrastructure backing them to do as they please, is the fact that there are no regulations going around. As Rao writes: “There are no regulations, accountability, and transparency regarding the functioning of private hospitals and diagnostic centres per se, though they provide a major share of care. Apart from illiteracy and absence of grievance redressal systems, information campaigns on unhealthy habits of behaviour have been severely comprised for want of funding and attention.”

Better regulation and grievance redressal mechanism can provide some help to prospective patients who are currently sitting ducks for medical professionals to aim at.
A similar information asymmetry also plagues savers looking to save their money in banks in the form of fixed deposits. Chances are you might walk into the bank wanting to save your money in the form of a fixed deposit but end up with an investment in some type of insurance policy, because the wealth manager at the bank convinced you.

The products are very different. Insurance policies lack liquidity, which fixed deposits have. Insurance policies cannot guarantee returns, which fixed deposits do. But insurance policies provide huge commissions to those selling them. And this is why wealth managers are so aggressive in wanting to sell them. Over the years, regulation on misseling has improved and that has been of some help.

In fact, in many cases, I have come to the conclusion, even the bank staff does not know what they are selling. But the solution here is straightforward. The right way of investing can be learnt by reading up and understanding the basics of different financial products on offer. This way the asymmetry of information can be brought down or completely removed, when it comes to financial products.

But the same cannot be done when it comes to doctors and our understanding of the human body.

The column originally appeared on August 23, 2017, in the Bangalore Mirror.

Dear PM Modi, India is Already Land of Self-Employed, and It Ain’t Working

narendra modi

The prime minister Narendra Modi in his Independence Day speech made last week said: “The Government has launched several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century. We have launched a massive program to provide collateral free loans to the youth. Our youth should become independent, he should get the employment, he should become the provider of employment. Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Adding to this, the Bhartiya Janata Party president Amit Shah recently said: “the youth have turned into job-creators from job-seekers“. Dear Reader, I would request you to keep these points in your head, while I set the overall context of this piece. As I have written on several previous occasions in the past, one million Indians enter the workforce every month. That makes it 1.2 crore Indians a year. There is not enough work going around for all these young individuals entering the workforce every year.

While, it is not possible for the government to create jobs for such a huge number of people, it is possible that the government makes it easier for the private sector to create jobs. (I will not go into this, simply because this is a separate topic in itself and I guess I will deal with this on some other occasion).

Take a look at Table 1. This is a table that I have used on previous occasions as well. But I need to repeat it, in order to set the context for this piece.

Table 1: Percentage distribution of persons available for 12 months 

What does Table 1 tell us? It tells us that only 60.6 per cent of the individuals who were looking for work all through the year, were able to find it. This basically means that nearly 40 out of every 100 Indians who are a part of the workforce and were looking for work all through the year, could not find regular work. In rural India, around half of the workforce wasn’t able to find regular work through the year.

This table is at the heart of India’s unemployment problem. Actually, we do not have an unemployment problem, what we have is an underemployment problem. There isn’t enough work going from everyone who joins the workforce. The solution that prime minister Narendra Modi has to this is that India’s youth should become self-dependent and seek self-employment. In the era of post-truth, this sounds like a terrific idea. But this is nothing more than marketing spin.

Let’s look at some data on this front. As the Report on the Fifth Annual Employment-Unemployment Survey, 2016, points out: “At the All India level, 46.6 per cent of the workers were found to be self-employed… followed by 32.8 per cent as casual labour. Only 17 per cent of the employed persons were wage/salary earners and the rest 3.7 per cent were contract workers.”

The point being that nearly half of India’s workforce is already self-employed. And they aren’t doing well in comparison to those who have regular jobs. Take a look at Table 2.

Table 2: Self-employed/Regular wage salaried/Contract/Casual Workers
according to Average Monthly Earnings (in %) 

What does Table 2 tell us? It tells us very clearly that self-employment is not as well-paying as a regular salaried job is. As is clear from the table nearly two-thirds of the self-employed make up to Rs 7,500 per month. In case of the regular salaried lot this is at a little over 38 per cent. Clearly, those with regular jobs make much more money on an average.

Further, only 4 per cent of the self-employed make Rs 20,000 or more during the course of a month. In comparison, more than 19 per cent of individuals with jobs make Rs 20,000 or more during the course of a month.

What Table 1 and Table 2 tell us is that India’s youth have already taken to being self-employed. Hence, there is nothing new in Narendra Modi’s idea. Further, it is clearly not working.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. The phrase summarises the situation very well.

Other than the reluctant entrepreneurs, more than 30 per cent of the workforce comprises casual labourers, who seek employment on an almost daily basis. The reluctant entrepreneurs and casual labourers looking for daily work essentially tell us that no one can really afford to stay unemployed.

Hence, the problem is not a lack of employment but a lack of employment which is productive enough.

Prime minister Modi talked about his government launching, “several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century.

How good does the data look on this front? As the Volume 2 of the Economic Survey of 2016-2017 points out: “For urban poor, Deendayal Antyodaya Yojana National Urban Livelihoods Mission (DAYNULM) imparts skill training for self and wage-employment through setting up self-employment ventures by providing credit at subsidized rates of interest. The government has now expanded the scope of DAY-NULM from 790 cities to 4,041 statutory towns in the country. So far, 8,37,764 beneficiaries have been skill-trained [and] 4,27,470 persons have been given employment.

The annual report of 2016-2017 of the Ministry of Skill Development and Entrepreneurship of the government of India makes an estimate about the number of people trained by different ministries during the course of the financial year. For the period April to December 2016, the number is at around 19.59 lakh. The annual target was set at 99.35 lakh. Given this, the gap between the target set and the target achieved is huge.

Another way of looking at this is that 1.2 crore Indians are entering the workforce every year. They have had an average education of around five years (i.e. they have passed primary school). Given this, they really don’t have any work-related skillset. At best, they can add and subtract, and perhaps read a little.

Hence, they need to be trained or there need to be enough low skill jobs going around. Real estate and construction, the two sectors that can create these kind of jobs, are in a huge mess. This is something that can be sorted, but in order to do that some serious decisions on black money need to made. This includes cleaning up of political funding and the change in land usage regulations at state government level.

Take a look at the following graphic (Figure 1) reproduced from the annual report of the Ministry of Skill Development and Entrepreneurship.

Figure 1: 

What Figure 1 tells us very clearly is that the scale that is needed to train people is simply not there. And this will lead to a substantial chunk of individuals entering the workforce looking for low end self-employment opportunities anyway, as has been the case in the past. Or people will continue to stick to agriculture.

Prime Minister Modi in his speech further said: “Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Let’s look at this statement in some detail. Between April 2015 and August 11, 2017, the government gave out Mudra (Micro Units Development and Refinance Agency Bank) loans worth Rs 3.63 lakh crore to 8.7 crore individuals. This works out to an average loan of around Rs 41,724. There is no evidence until now whether this is working or not. Can a loan of a little under Rs 42,000 provide employment to one, two or three more people, is a question which hasn’t been answered up until now.

The CEO of Mudra was asked by NDTV recently, as to how many jobs had the Mudra loans created. He said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”Given this, Mudra loans making millions of youth self-dependent is presently nothing more than something that prime minister Modi likes to believe in.

While he is entitled to his beliefs, I would like to look at some data before concluding that Mudra loans are the answer to India’s job crisis.

The column was originally published on Equitymaster on August 21, 2017.

Who Will Break the Google Monopoly?

google

I first discovered the internet nearly two decades back. It was an era when the internet speed was slow and the charges were extremely high. One could end up paying as much as Rs 120 per hour at an internet café. In fact, the first few times I logged on to the web, I wondered what was the fuss all about.

It is worth remembering here that I am talking about an era when even the humble sms was yet to make an appearance and the mobile phone rates were extremely expensive, with one having to pay for both incoming as well as outgoing calls. It was also an era when people largely surfed the internet from internet cafes. Of course, all that has now moved to the smart phone and home WiFi connections.

After a few sessions at internet cafés, I was told that there are websites known as search engines which allow you to search for stuff on the internet. One such website was called Ask Jeeves and there were others like Lycos and Alta Vista. While, all this sounded interesting, rarely did these websites throw up what one was searching for.

As Tim Harford writes in Fifty Things That Made the Modern Economy: “In 1998… if you typed ‘cars’ into Lycos—then a leading search engine—you’d get a results page filled with porn websites. Why? Owners of porn websites inserted many mentions of popular search terms like ‘cars’, perhaps in tiny text, or in white on white background. The Lycos algorithm saw many mentions of ‘cars’, and concluded that the page would be interesting to someone searching for ‘cars’.” It was easy to game the system. This is something that I personally experienced when I first started to use the internet regularly in 1999.

And then came Larry Page and Sergey Brin with Google. Their original idea was not come up with a search engine at all. In fact, they were trying to do something different. They were trying to build a system in order to measure how much credibility a research paper had. In academia, a research paper published in an academic journal is said to have credibility, if it is cited by other research papers. It has even more credibility if it is cited by research papers which are themselves cited many times by other research papers.

This led to the basic idea behind the Google search engine. As Harford writes: “Page and Brin realised that when you looked at a page on the nascent World Wide Web, you had no way of knowing which other pages linked to it. Web links are analogous to academic citations. If they could find a way to analyse all the links on the web, they could rank the credibility of each page in any given subject.”

And this idea essentially led to Google throwing up relevant search results unlike other search engines. The irony is that Page and Brin were not really sure of the potential of what they had built. As Duncan J Watts writes in Everything is Obvious – Once You Know the Answer, “In the late 1990s the founders of Google, Sergey Brin and Larry Page, tried to sell their company for $1.6 million.” The story goes that the buyer thought that Brin and Page were asking for too high a price and decided not to go ahead with the deal.

Thankfully, they didn’t. And now they are in a position where they have a natural monopoly. Why? As Harford writes: “Among the best ways to improve the usefulness of search results is to analyse which links were ultimately clicked by people who previously performed the same search, as well as what the user has searched for before. Google has far more of that than anyone else. That suggests it may continue to shape our access to knowledge for generations to come.”

The column originally appeared on August 16, 2017 in the Bangalore Mirror.

On Selfie-Love

dhinkchak pooja

The latest internet sensation is a young woman who goes by the name of Dhinkchak Pooja. And her claim to a fame is a totally tuneless song called selfie maine le li yaar (My friend, I have taken a selfie).

For those who still don’t know what a selfie is, it is a self-photograph taken with a digital camera. To go a step ahead, once the selfie has been taken, it is posted on the social media.

A good selfie song would have talked about the current obsession to click selfies and post it on the social media. But sadly Dhinchak Pooja’s song doesn’t.

What explains this selfie obsession? In order to answer this question, we will have to look at some history.

As Seth Stephens-Davidowitz writes in Everybody Lies—What the Internet Can Tell Us About Who We Really Are: “When photographs were first invented, people thought of them as paintings. There was nothing else to compare them to. Thus, subjects in photos copied subjects in paintings. And since people sitting for portraits couldn’t hold a smile for the many hours the painting took, they adopted a serious look. Subjects in photos adopted the same look.”

And this created a problem for the film and camera company Kodak. People were not clicking enough pictures. In order to correct this, Kodak devised a strategy. As Davidowitz writes: “Kodak’s advertising began associating photos with happiness. The goal was to get people in the habit of taking a picture whenever they wanted to show to others what a good time they were having. All those smiling yearbook photos are a result of that successful campaign (as are most of the photos you see on Facebook and Instagram today).”

Over a period of time, the camera and the photo films, were replaced by digital photography. The irony is that Kodak developed the first digital camera, but did not cash in on it. As Mark Johnson writes in Seizing the White Space:In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”

Sasson was told “that’s cute – but don’t tell anyone about it.” The reason for this was very straightforward. Kodak at that point of time was the largest producer of photo film in the world. And there was no way it was letting filmless photography destroy that market.

But nobody can stop an idea whose time has come. Digital photograph went from strength to strength despite Kodak. And the funny thing is that the association between photographs and the idea of having a good time continued, and only grew stronger. In fact, digital photography along with social media has made it even more easy for people to show that they are having a good time.

Digital photography has now moved on to smart phones and costs nothing after the fixed cost of buying the phone has been made.  Earlier one could only click a certain number of pictures with a photo film. After that a new film had to be bought and that cost money. These pictures had to be then developed in a lab and that cost money as well. Hence, people couldn’t go totally overboard while clicking pictures.

The digital pictures in particular selfies can be posted on to the social media to tell the world what a good time the person taking the selfies is having, which is why so many selfies are taken in the first place.

The camera companies which are the new photo film companies understand this association of photography with happiness and showing off, and that explains to a large extent why so many camera ads are now built around the idea of taking pictures in general and selfies in particular.

So, the more things change, the more they remain the same.

And we thought phones were something we used to talk to one another.

The column originally appeared in the Bangalore Mirror on August 9, 2017.

India@70: Where are the jobs?

indian flag

On August 9, 2017, lakhs of people belonging to the Maratha caste poured into the city of Mumbai for a silent march. 57 similar marches had already taken place in the state of Maharashtra, starting from Aurangabad on August 9, 2016. This was the 58th. The rallying cause behind the marches was to protest against the rape and murder of a teenaged girl belonging to the caste in Ahmednagar district in July last year. Other than the rallying cause, the Marathas have demanded quotas in government run as well as aided educational institutions. They also want reservations in government jobs.

Marathas are not the only land-owning caste in the country demanding a reservation in government jobs. Similar demands have been made by the Patels in Gujarat, the Kapus in Andhra Pradesh, the Jats in Haryana and the Gujjars in Rajasthan. The question is why do land-owning castes suddenly want reservation in government jobs, seven decades after Independence?

A major reason for this lies in the fact that the average size of a farmer’s landholding has fallen over the years. As the State of Indian Agriculture Report of 2012-2013 points out: “As per [the] Agriculture Census [of] 2010-11, small and marginal holdings of less than 2 hectare[s] account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size[s] of [the] holdings for all operational classes (small & marginal, medium and large) have declined over the years, and for all classes put together it has come down to 1.16 hectare[s] in 2010-11 from 2.82 hectare[s] in 1970-71.”

Take a look at Figure 1.

Figure 1:  Decline in the average size of agricultural landholdings between 1970-1971 and 2010-2011.

Source: State of Indian Agriculture Report, 2012-2013.

The agriculture census is carried out every five years. Hence, the latest available data is as of 2010-2011. The situation would have only gotten worse since then. The trend of falling farm sizes can be clearly seen from Figure 1. As the same piece of land has got divided among more and more family members over the generations, the average holding has fallen dramatically. And this has made agriculture unviable for many in the land-owning castes. Hence, the demand for reservation in government jobs.

The trouble is that the government doesn’t create jobs anymore, neither at the level of state governments nor at the level of the central government. Hence, what will happen once the land-owning castes figure this out? Will they demand reservations in private jobs as well?

The rate of unemployment

The irony is that the huge demand for jobs among the land-owning castes and others is not reflected in India’s rate of unemployment. The Labour Bureau carries out the Annual Employment-Unemployment Survey. This Survey is hardly annual. It was first carried out in 2009-2010. It skipped a year and was carried out for the next three years. It skipped a year again in 2014-2015 and was carried out again in 2015-2016. The 2015-2016 Survey is what will be discussed here.

The Labour Bureau basically measures unemployment using two methods. The first method is called the Usual Principal Status (UPS) approach. In this approach, “the major time spent by a person (183 days or more) is used to determine whether the person is in the labour force or out of the labour force.”

As per this method, the rate of unemployment was just 5 per cent.

The second method is called the Usual Principal and Subsidiary Status (UPSS) approach. Here, “a person who has worked even for 30 days or more in any economic activity during the reference period of [the] past twelve months is considered as employed under this approach.” As per this method, only 3.7 per cent of the workforce was unemployed.

Such low rates of unemployment are hardly surprising given the definitions of unemployment that are being followed. In the first method, an individual might have been unemployed for close to half the year but would still be considered to be employed. In the second method, an individual might not have had a job for 11 months during the year and would be considered employed.

Given this, the rate of unemployment does not tell us anything about the desperate search for jobs. But there is another set of data points that the Labour Bureau puts out, and that rarely makes it to the media. Take a look at Table 1.

Table 1:  All-India percentage distribution of persons available for work for 12 months (UPSS approach).

Source: Report on the Fifth Annual Employment-Unemployment Survey, 2016.

Table 1 basically tells us what proportion of the population which is looking for a job all through the year is able to find one. Around 61 out of 100 Indians in the workforce looking for a job all through the year are able to find one. In rural areas, only around 53 out of 100 individuals who are looking for a job all through the year are able to find one. These numbers point towards the huge underemployment of India’s workforce.

This is hardly surprising given that in the last two financial years, agriculture has contributed around 14 per cent to the gross domestic product and employed close to half of the working population. There is a clear mismatch here. Around half the country’s workforce is only contributing 14 per cent of the GDP.

What this means is that there is huge disguised unemployment in the rural areas. Disguised unemployment essentially means that there are way too many people trying to make a living out of agriculture. On the face of it, they seem employed. Nevertheless, their employment is not wholly productive, given that agricultural production would not suffer even if some of these employed people stopped working.

So, the unemployment numbers might not point towards India’s distressing job situation but the underemployment number clearly does. This is also borne out in Figure 2, which has been sourced from a recent report titled OECD Economic Surveys India.

Figure 2:

This report puts the rate of unemployment among India’s youth between the ages of 15 and 29 at more than 30 per cent. These youths are neither employed nor in education or training.

Regular unemployment data

The Fifth Annual Employment-Unemployment Survey was carried out in 2015-2016. It has been close to a year and a half since then and we haven’t had any fresh unemployment data being published by the government.

As Volume 2 of the Economic Survey of 2016-2017 released earlier this month, points out: “The lack of reliable estimates on employment in recent years has impeded its measurement and thereby the Government faces challenges in adopting appropriate policy interventions.” It then lists out 10 ways used by the government to measure unemployment and the problems with them. The problems listed are: “Partial coverage, inadequate sample size, low frequency, long time lags, double counting, conceptual differences and definitional issues, rarely used for the purpose of employment estimation etc.” This, of course, leads to the question why have 10 wrong ways of measuring unemployment and not one right way?

The government has tried to correct this by setting up a task force headed by [now former] NITI Aayog Vice-Chairman Arvind Panagariya to generate timely and reliable employment data. This is a step in the right direction. The tragedy is that this should have happened many years back, even before Narendra Modi took over as the prime minister. Of course, the previous governments are to be blamed for this as well. The Modi government also took more than three years to initiate something to solve this problem.

The trouble is that close to one million Indians are entering the workforce every month. That makes it around 1.2 crore Indians a year. And the government is still struggling with counting the number of the unemployed.

What makes things worse is that most of the individuals who are entering the workforce are not skilled enough. Over the years, the government has tried to correct this by outsourcing skill development to the private sector rather than just depending on the Industrial Training Institutes or the ITIs. But the scale of operation continues to remain very small.

As the Economic Survey referred to earlier points out: “For urban poor, Deendayal Antyodaya Yojana National Urban Livelihoods Mission (DAYNULM) imparts skill training for self and wage-employment through setting up self-employment ventures by providing credit at subsidized rates of interest. The government has now expanded the scope of DAY-NULM from 790 cities to 4,041 statutory towns in the country. So far, 8,37,764 beneficiaries have been skill-trained [and] 4,27,470 persons have been given employment.” When one million Indians are entering the workforce every month, this is not even a drop in the ocean.

Other data points

While we may not know the right rate of unemployment on a regular basis, there is enough other data that suggests that job creation is not happening. Take a look at Figure 3. It basically plots the bank lending to industry.

Figure 3:

Source: Reserve Bank of India.  

The lending carried out by banks to the industry has fallen over the years. In fact, in 2016-2017, the lending to industry shrunk by more than Rs 50,000 crore. This basically means that on the whole, the banks did not lend a single new rupee to the industry in 2016-2017. The reason for this is very straightforward. The industry has defaulted on its past loans and banks are no longer in the mood to lend.

This also shows us that the industries are no longer borrowing and expanding and creating jobs in the process. Of course, banks are not the only source of borrowing for industry. If we were to look at the overall flow of financial resources to the commercial sector it was down by around 11 per cent in 2016-2017 in comparison to a year earlier (Source: RBI Monetary Policy Report April 2017).

Over and above this, demonetisation had a huge negative impact on jobs in the informal sector. The Bharatiya Mazdoor Sangh (a trade union affiliate of the BJP) estimated that nearly 2.5 lakh units in the unorganised sector were closed down. Then there is the latest Reserve Bank of India (RBI) Consumer Confidence Survey. More people now believe that the employment conditions have worsened over the last year.

The leaders of the Bharatiya Janata Party like to claim that crores of jobs have been created through Mudra (Micro Units Development and Refinance Agency Bank) loans given out by banks. In 2015-2016 and 2016-2017, a total of 7.46 crore individuals were given Mudra loans. Hence, 7.46 crore jobs were created is the logic that is offered. But this is something that the CEO of Mudra does not confirm. As he told NDTV recently, when asked how many jobs had these loans created: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.

The point being India has a serious jobs problem and we aren’t doing much to tackle it. And there are going to be no acche din without jobs.

The column originally appeared on Newslaundry on August 15, 2017.