Digital tools speed subsidies, services to India’s poor

Pramod Varma explains why technology-based ID systems can help ensure state-backed subsidies such as food and fuel rations reach their intended recipients

India’s experiment with digital tools could help fast-track financial inclusion and put basic services into the hands of the poorest, according to one industry expert.

Pramod Varma, chief architect of a national biometric ID system, Aadhaar, that aims to ensure state-backed subsidies such as food and fuel rations reach their intended recipients, said digital identity systems cut the risk of corruption and fraud, and could help increase the delivery of education and healthcare to India’s poorest communities.

“Identity is fundamental to everything,” said Varma. “Most people are so ignored in the system, because it doesn’t know they exist. You need to be able to bring them into formal systems for banking, for insurance, for savings. None of these are accessible to more than half the country. And that is something we had to break.”

In 2012, India spent more than 2 per cent of GDP on direct subsidies to the poor, such as cash transfers, food and fertiliser. Two years ago, India’s fuel subsidy bill alone cost 1 per cent of GDP, according to the IMF.

The government has since made attempts to slash these bills, in part because a significant portion of that money is lost to inefficiency or corruption such as ghost recipients who only exist on paper, said Varma.

Aadhaar’s technology – which assigns a unique number to each person using their photo, fingerprint or iris scan – has enabled the government to make savings, for example on cooking gas subsidies. Previously, pre-subsidised gas cylinders were hoarded by distributors and – instead of being sold to the poor – diverted and sold at twice the rate on the black market.

Eliminating the pre-subsidy and instead giving recipients $5 each directly into bank accounts, verified by Aadhaar, saved India $2bn in the first year, according to Varma. Setting up the ID system scheme cost $5bn over five years.

Using digital tools means transactions and “banking comes to me, anywhere, anytime. It means I don’t have to go to an office, which becomes a corruption point,” said Varma.

Getting people to sign up to the scheme was a challenge, because of the abstract nature of using biometric data, rather than a physical ID card. Since Aadhaar was formed in 2009, however, nearly 1 billion people have registered.

In India, 46 per cent of adults now own a bank account, up from one-third in 2011, according to the World Bank. Still, 230 million Indians with an account pay utilities or school fees in cash. India’s population was almost 1.3 billion in 2014.

By using technology to verify identity, the banking sector in particular has been able to reduce paperwork and cut costs, enabling more low-income consumers to open a bank account for the first time to receive pensions, salaries or subsidies. Some 200m bank accounts were opened in a year, according to Varma. This opens up the services available for the poor, such as savings accounts and micro-ATMs where local entrepreneurs can distribute cash in villages.

“Once money became accessible, within a year we saw people leaving money in the bank and start to make small savings,” said Varma. “They started to see what it means to get interest when you save. Nobody usually pays them back in life.”

Now, the Aadhaar system is branching out through India Stack, a digital infrastructure that is “presence-less, paperless and cashless”, according to Varma, and aims to broaden access to other financial offerings and basic services such as healthcare and education at a very low cost.

The programme began two pilot projects in April to boost formal savings through small-scale investing of around $2 a month, and offer microcredit. The project hopes to bring startups into the ecosystem to provide these services.

“At the end of the day it’s all about efficiency and access. Those are key to anything that needs to scale up to 1 billion people,” said Varma.