Financing Universal Healthcare Part II: What model should India prefer?

Posted on November 24, 2008


If India is to deliver UHC to its citizens, a key policy decision she will have to make is deciding the system of financing – tax funded or mandatory social health insurance (SHI). In an earlier blog entry I have discussed the basic underlying principals of these systems and their relative advantages and disadvantages. The critical success factor for the tax-funded system is the tax base, specifically direct tax base, of the country and for the SHI system it is the number of people employed in the organised sector. To find where India has a relative advantage, on these critical success factors, I have relied on the data from the Economic Survey of India 2007-08.

According to the survey, in 2005 there were 26 million Indians employed in the organised sector; of these the government employed 18 million and the private sector 8 million. Over the 13 year interval from 1991 to 2005, the organized private sector has created new jobs at a CAGR of 0.8% and the government has reduced jobs at a CAGR of 0.5%. The net impact of these trends is that over the 13 year interval, the number of Indians employed in the organized sector has remained constant; actually slightly reduced. Remember these years coincide with India’s Great Leap Forward marked by liberalisation of financial, industrial and labour markets and a high rate of economic growth. If this period has not seen any substantial increase in organised sector employment, it is fair to assume that India will not see any dramatic increase in organised sector employment in the foreseeable future.

According to the survey, in 2004-05 India earned Rs. 4.9 trillion as tax revenues; direct taxes amounting to Rs. 1.3 trillion and indirect taxes to Rs. 3.6 trillion. Over the 13 year interval from 1990-91 to 2004-05, direct tax revenues increased at a CAGR of 23% and indirect tax revenues increased at a CAGR of 14%. More importantly the share of direct taxes in total tax revenues went up from 12% to 27%. The net impact of these trends is that over the 13 year interval, India’s tax revenue has increased at a CAGR of 15%. Even correcting for inflation, one can, in the significant increase in the tax base, clearly see the impact of India’s Great Leap Forward.

Assuming every individual employed in the organised sector is part of a 6 member household, SHI schemes targeting the organised sector can help cover no more than 160 million Indians or less than 15% of the population and one does not see any significant improvement in this number in the foreseeable future. On the other hand, given all indicators pointing to sustained growth of India’s economy, India’s tax pool will keep increasing and her ability to fund and sustain a universal healthcare initiative will dramatically improve. In another previous blog entry I had commented on the formulaic spending pattern of Indian States on healthcare. With a growing kitty of tax revenues, I believe, States now have an opportunity to be bold and creative with their healthcare programs.

I am not competent to discuss the merit, or otherwise, of this feature of India’s economic growth that has not delivered commensurate increase in organised sector jobs. To me this feature of India’s economic growth is a reflection of the environmental, historical, socio-political and technological environment that India is confronted with and the choices that she has made. I therefore treat the state and trajectory of India’s economy as given and conclude that India will be well served in deciding in favour of a tax-funded UHC.