Big-bang announcements of public policy initiatives usually peter out without a whimper. With the five-year plans providing a convenient stage and the required props, these policies are refurbished and re-launched with a bang. Sadly, the result remains more or less the same. This pattern is repeated across ministries and departments.

The evidence for this trend is the large proportion of the funds allocated to the various schemes which remain unutilized. ISHUP (Interest Subsidy Scheme for Housing the Urban Poor) was part of the 11th five-year plan from December 2008 to September 2013. It provided interest subsidy to economically weaker section (EWS) and low income group (LIG) beneficiaries on home loans from banks/housing finance companies (HFCs). Out of an outlay of ₹ 1,100 crore, only ₹ 8.22 crore (less than 1% of the funds) was utilized.

A government press release attributed the dismal performance to the lack of willingness on the part of banks to provide loans to these segments.

ISHUP was refurbished and relaunched as the Rajiv Rinn Yojana (RRY) in October 2013 in the 12th five year plan. RRY increased the loan amount eligible for subsidy and changed the method of subsidy application. With a sense of déjà vu, The Hindu reported on 16 February that the ministry of urban development had found that the funds set aside for schemes such as the RRY, the National Urban Livelihood Mission and the Rajiv Awas Yojana are not being utilized.

Why is free money being left on the table?

The pressures of electoral politics necessitate big-bang pronouncements—these get media coverage and also provide handy copy for advertisements in elections. Populism requires goals which are defined in a manner easily understood by the masses—the result is warped thinking about the “public good" and distorted policy choices.

For instance, in the case of RRY, should the public good be “affordable shelter" or should it be “creating immovable assets for the urban poor"? Should the policy objective be to facilitate the creation of the required supply of “shelter" in the market and leave the decision to the consumer to make an optimal choice or should the policy translate to “giving money (subsidy) to poor"? No prizes for guessing which one would appeal to politicians.

The real estate market in India suffers from multiple inefficiencies—large swathes of areas in cities have “illegal" settlements where banks do not approve loans, the supply of affordable housing is constrained by a lack of clear rules on land development, ill-defined zoning laws, faulty urban planning and by-laws, flaws in land registration systems and lack of reforms necessary to make land available for low-income housing. A direct intervention with an interest subsidy scheme in such an inefficient market would be a non-starter—it does not need an expert to figure out that the budget for RRY would stay unspent.

When the policy overlooks the commercial impact on intermediaries who also carry profitability targets, it runs the risk of being wilfully aborted. In the case of RRY, the method of passing the interest subsidy to the beneficiary results in a potential loss of interest for the bank/HFC of more than 25%. This impact is quite large and cannot be made up by the expected increase in the demand of loans due to a reduction in the price (interest rate)—in such a scenario, there would be little motivation for the intermediary to promote the scheme.

In a typical top-down process of policymaking, the intended beneficiaries and the intermediaries are not involved. There is a lack of consultative structures to ensure that all aspects of the policy are analysed and roadblocks to implementation removed. Akin to trying to rig the sails when the boat is out at sea, policymakers try to fix things as they go along. Such efforts slow down progress and lead to general confusion and lethargy. Soon it is time for the next five-year plan—and the cycle repeats itself.

The Jan-Dhan Yojana is another example of a scheme suffering from the above drawbacks.

A big-bang announcement by the prime minister in his maiden Independence Day speech, it is a refurbished version of Swabhimaan—a policy for financial inclusion launched in 2011—with the addition of overdraft and insurance. Lack of incentives for intermediaries and the possibility of losses in maintaining each such accounts has resulted in private banks contributing to less than 5% of the accounts opened in Jan-Dhan Yojana so far. Providing overdraft and insurance on such a large scale in a profitable and sustainable manner is a complex process of product design and implementation. These details are being worked out post launch—a lack of holistic view and top-down policymaking is much in evidence.

The road to hell is paved with populist schemes, floated with or without good intentions. While democracy is critical for broad-based progress, deeper thinking about the public good to be provided and the manner of intervention best suited to yield results would serve the public better, although maybe not the politicians.

Vinay Singh and Rohit Prasad are, respectively, research scholar and associate professor at MDI, Gurgaon.

Comments are welcome at theirview@livemint.com

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