Financial Inclusion : The vital Aadhaar

 With the advancement of technology in all walks of life, it is praiseworthy that Govt. is up to providing digital identity through Aadhaar to the people of country. It climbs a further step by enabling the citizens to use this Aadhaar identity for the purpose of gaining various benefits and services provided by Govt. or private agencies. If you turn your back on the political motive, the intent behind direct cash transfer of subsidies to the beneficiaries seems to be absolutely a commendable step taken by Govt. In theory, this Aadhaar-enabled-service-delivery may put an end to the problem of bogus beneficiaries and a resultant leakage of valuable resources.  Aadhaar can become a launch pad for the final destination of direct cash transfer of subsidies to the needy, provided the challenges of implementation and financial inclusion could be dealt swiftly in mission mode.

The Unique Identification Authority of India (UIDAI) is responsible for providing a 12 digit unique bio metric identification to all Indians.  Poor and underprivileged may also avail social benefits through this identity number via banking services, which most of them are devoid of till date. But providing Aadhaar card to every beneficiary is an uphill task  in the first place. The expedite expansion of the system of Aadhaar-card distribution in far off places is a huge challenge, to begin with. First Aadhaar Number was issued in a remote tribal village of Maharashtra in September, 2009. The Unique Identification Authority have registered more than 24 crore people in the country since two years. So far, 200 million people i.e.about 16% of India’s population have been issued Aadhaar numbers. UIDAI has set the target of providing Aadhaar no. to the 60 cr people in the first phase. It means at least one of three Indians will possess a unique identification (UID) number by next year. It is easier said than done given the procrastinating administrative set up.  

The government is rolling out Aadhaar Enabled Service Delivery initiatives in 51 districts across the country. Aadhaar-enabled applications will be used for making pension payments, MNREGA payments, PDS distribution and scholarship payments, among others. The Govt. is in tearing hurry to start cash transfers though a host of states have a negligible presence on Aadhaar map.  Asymmetric distribution of Aadhaar in the country is a major challenge the mechanism is facing now. A full scale nationwide implementation of Aadhaar is critical to meet the deadlines set by Govt for direct cash transfer of subsidy. Expansion of Aadhaar will now solely depend on the pro-activeness of state governments. It is a humongous task on the part of the Govt. to feasibly encompass all the states in the implementation of its ‘dream project’.

 The not-so-expanded banking system poses another risk to the full scale implementation of direct-cash-transfer mechanism. A close to 60 percent of India’s population is un-banked. Not many people in India yet hold a bank account, while  rural branches network of banks is meager and yet to be computerized fully. It will be tough business call for the banks to go for a massive investment in social banking and financial inclusion amid the pressure on margins and rising of bad debts. Banks are unwilling to bear the cost of opening up branches in remote areas without a proper business preposition. The moot challenge is how to strike a fine balance between banks' profits and social responsibility.  The direct cash transfer of subsidy can never function in the absence of all pervasive banking system.

 Subsidy payments and benefits under different schemes amount to nearly Rs.3 trillion, roughly 3.5% of the gross domestic product, according to government estimates. This can only be contained when we a have a robust identity data of the targeted populace and a widely spread banking network. Aadhaar has solved a major problem of giving an identity to the faceless beneficiary but fact remains that it is still a pilot scheme. A noteworthy reduction in subsidy shall only be possible if the Aadhaar becomes a mission via meticulous planning and quick implementation.

Cash subsidy: Identify the needy

India’s perennial challenge of wasteful government expenditure and mounting subsidies has surfaced again with worsening state of fiscal management. Rampant corruption in social schemes is also compelling government to go for a complete revamp of   welfare programs. India has just initiated a radical overhaul of welfare schemes that would see the government make cash payments direct to the needy.  The government is launching an ambitious scheme for direct electronic transfer of cash to beneficiaries that is expected to cover one quarter of households of the country. After several trials of cash transfers in different areas of India this is the first major initiative at national level. Direct cash transfer of subsidies is a welcome move as long as government system can handle the colossal task of identification of true beneficiaries and bringing them in to formal banking network.

 Bloating subsidies and inefficient expenditure has become a lasting bane for India’s fiscal health. Indian Government has always been generous in providing fuel, food, power and fertilizer on cheaper rates than the actual costs. Subsidies are meant to address poverty in India. There is no uplift of poor and below poverty line people as most of the government benefits never reach to the needy populace. The current emergence is how to plug the leakage of subsidies and target the subsidies for poor. The government has pegged its outgo on food, fuel and fertilizer subsidies in the 2012-13 fiscal at over Rs 1.79 lakh crore, nearly 14 per cent lower than the revised estimates for the current fiscal. According to the Budget proposals, the government's subsidy bill on food, petroleum and fertilisers is estimated at Rs 1,79,554 crore for the 2012-13 fiscal as against Rs 2,08,503 crore in the revised estimates for this fiscal.

 The debate to cut subsidies has become more prominent after the recent  report of Dr Vijay Kelkar Committee on fiscal consolidation. Report  says the economy is on the edge of a "fiscal precipice" and if the government does not cut subsidies on fuels, food and fertlisers, the budget deficit could go out of control in current fiscal year. The report notes that whereas Budget 2012-13 sought to limit subsidies to 2 percent of GDP, that number will likely be overshot. Report cautions in an unequivocal terms that  “A do-nothing approach would mean the risk  of a much larger adjustment of incomes and spending forced by the markets, both domestic  and international, with a spiraling fiscal deficit and its consequences for much slower growth,  rising unemployment, and higher inflation.”

 The plan to start  direct cash transfer of subsidies has come in this premise.  Against the backdrop of corruption and pilferage in various schemes, the government has been thinking about direct cash transfers to genuine beneficiaries to plug leakages as it is expected to bring down the subsidy burden.
 The beneficiaries will include poor people. Of them, the Unique Identity (UID) Mission (Aadhar)  has already enlisted 200 million people and the number is expected to go up to 600 million in the next six month. The program will initially cover scholarships, pensions and unemployment allowances and later MNREGA and Public Distribution Schemes. A Cash Transfer System can be used for transferring cash benefits such as MNREGA wages, scholarships, pensions, income support of other types and health benefits.  The program is inspired by such successful schemes existing in countries like Brazil and Mexico and cities like New York and Washington.

  The whole idea of cash transfers must be seen into the context of few bottlenecks. Indian economic and social planning is marred with critical data gaps. The unavailability of a credible income data is the oldest inhibiting factor in the implementation of welfare schemes. India still lacks an authentic data of people living below poverty line as host of official poverty estimates are just in the chorus of mutual contradiction. The governor of the Reserve Bank of India has recently complained about the quality of data made available. The credibility deficit about Indian socio-economic data has been created because of the glaring errors but also because of the unnecessary politicization of the data. So much so that today nobody trusts our employment estimates, industrial production estimates, inflation estimates and certainly not the ones on poverty. We must have a credible income data  at the earliest to identify beneficiaries for getting cash transfers. The next big challenge is that a large part of Indian population is just out of formal banking network. As proposed move aims to transfer individual benefits from the government directly into the bank accounts of beneficiaries, lack of financial inclusion will be a major roadblock. Indian banking sector is required to gear up to reach out with the poor.  

  The success of this plan will largely depend on the government’s efficiency in dealing with the fundamental issues like the basis of targeting, definition of poverty line and identification of intended beneficiaries. Devising a methodology to transfer the cash subsidy to the poor is going to be a tough task. Central government will also need a proactive support of state governments in taking up fundamental reforms required in refurbishment of welfare system. Direct transfer of subsidies to poor is a far-reaching move. The new system is expected to reduce the cost and subsidy bill through better targeting providing the government could identify the needy in a transparent manner.