Make States Healthy Again

Context: State governments can be better armed financially to fight COVID-19 by issuing public health bonds.

Present status of the States

• Limited Fiscal Power: due to centralized Public finances, dried up tax revenues from fiscal instruments during the lockdown, high expenditure on health, and migrant transportation.

• Increased borrowing: GoI increased the states’ limit for FY2020-21 borrowings by 1-2% of state GDP, but with conditionalities.

Health is Wealth: Public health investments can generate large economic returns

• Babies born to infected (Spanish Influenza) mothers in the US were up to 15% less likely to graduate from high school (A 2006 study by Douglas Almond). 

• Large-scale malaria reduction in the 1950s in India generated 2% greater annual income for adult men plus savings from treatment in public hospitals. 

• Deworming pills costing just a few cents per dose had large cognitive effects, comparable to 0.5-0.8 years of schooling (A 2018 study in Kenya).

• Immunizations yielded a net return about 16 times greater than costs over the decade (2016 WHO study) 

Proposal for Long Duration Public Health Bonds

• Issued by state governments:  for at least 10 years’ of (ideally 30 years’) maturity in domestic capital markets, to raise funds specifically for health care expenditure, worth 1% of the issuing state’s GDP. 

• Exploiting the virtuous cycle: 

• The potential impact of borrowings in the interest rates can be compensated with the higher income level and tax revenues in the future. 

• This also necessitates bods to be long-termed as opposed to short-termed where repayment schedule will not match the boost in tax revenue.

• Limiting the Health Bond:  for the public health expenditure only with a special focus on early childhood and maternal care, communicable diseases, and sanitation.

• Attractiveness of bonds: 

• Attractive to investors looking for higher returns than GOI debt, but at lower risk than corporate bonds. 

• Impact investing may attract civic-minded households concerned about India’s public health infrastructure and wish to contribute positively. 

• Spirit of impact-investing: may boost returns for institutions with statutory constraints to invest only in government securities

Conclusion: 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.