two significant value additions. First, it has lowered the transaction costs of delivering targeted benefits by the government: the PAHAL scheme of transferring LPG subsidies has already reduced leakages by 24%; the potential annual savings is expected to be roughly of the order of INR 127 billion (Government of India, 2016). Second, the process has permitted to eliminate ‘ghost’ and duplicate households from beneficiary rolls. Contextually, it may be mentioned that G2P payments have been extensively employed across countries, with varying degrees of success.
Box 2: G2P payments: Evidence and practices
In a number of countries, governments have sought to increase the use of electronic means for government payments and to promote greater financial inclusion Government of India (2014b). While the two agendas have by no means converged yet, in practice they have often been translated into a single objective i.e. to increase the proportion of recipients of government social cash transfers who receive payment directly into a bank account. On the one hand, such payments are seen as likely to reduce the cost of payment for government and make delivery more convenient for recipients, compared with the prevalent cash-based schemes, which could entail significant transactions costs. On the other hand, a bank account has been seen as the means to enter into the wider world of formal financial services (Bold, Porteous and Rotman, 2012).
The empirical literature is fairly unambiguous that digital payments provide huge development gains. In the African country of Niger, researchers found that making social safety net payments via mobile phones versus having to go in person reduced overall travel and waiting time by 75 %, providing people with the flexibility of time in attending to more productive tasks (Aker, Boumnijel, McClelland and Tierney, 2016). Mexico’s shift to digital payments cut spending on wages, pensions, and social benefits by 3.3 % annually, or almost $1.3 billion (Babatz, 2013). When Argentina moved payments for a large national social program from cash into accounts, demand for kickbacks virtually disappeared (Duryea and Schargrodsky, 2008).
Similar evidence is also in evidence in the Indian context. Evidence proffered by Muralidharan, Niehans, and Sukthankar (2016) shows that digitizing social security transfers caused demands for bribes to drop by 47%, and led to beneficiaries receiving higher payments. Barnwal (2015) estimates that better targeting of LPG subsidies would entail a saving of about US $1 billion for the Indian government.
Not surprisingly therefore, the federal government has been switching to digital modes of transfer of subsidies and other benefits to the intended beneficiaries. Direct benefit transfer (DBT) has been introduced by the central government in January 2013 in select districts encompassing 26 central sector (CS) and centrally sponsored schemes (CSS). Presently, 34 CS and CSS schemes and three subsidy-related schemes are being covered under DBT. A total amount of INR 134 billion was disbursed at the end of March 2015, encompassing manifold programs in areas as diverse as public works (e.g. Mahatma Gandhi Rural Employment Guarantee), women welfare (Janani Suraksha), and LPG benefits (PAHAL).
Akin to the Federal government, state governments also offer several schemes for the intended beneficiaries Government of India (2014a). To illustrate, the government of West Bengal runs a conditional cash transfer scheme, Kanyashree Prakalpa, for the empowerment of adolescent girls. Under the scheme, zero-balance bank accounts are opened in the name of the girls through simplified account opening procedures. A total of INR 1848 million was spent under the scheme 2014–2015. In a similar vein, Telangana government has introduced an AASARA pension scheme for disabled, old age persons and widows, wherein the monthly pension amount is remitted into the bank/post office account of the pensioner. During 2015–2016, INR 25670 million has been provided for the scheme. The Government of Madhya Pradesh started the Laadli Laxmi Yojana in 2007 with an objective of women empowerment through improvements in their educational and economic status. Under the scheme, National Savings Certificates worth INR 6,000 are purchased by the State Government in the name of a girl every year after she is born till the amount reaches INR 30,000. The government allocated INR 7,780 million for the scheme in 2014–2015. The government of Tamil Nadu runs a maternity benefit scheme for pregnant woman of below poverty line (BPL) group, wherein cash assistance of INR 12,000 is given to pregnant women. While in some cases the state governments have been resorting to electronic modes for payments, it has not yet gathered sufficient momentum.
Second, the recently introduced Unified Payments Interface (UPI) is expected to revolutionize the way retail payments are made in the country. The system permits a one-click, two-factor authentication on mobile phones across bank accounts, based on the Immediate Payment Service (IMPS) platform. Unlike the IMPS which requires details such as Mobile Money Identifier — a seven-digit number issued by a bank — mobile and account numbers to complete a transaction, UPI will require only one identification and does not necessitate information regarding the bank account details of the parties.
One aspect of ICT which has attracted the attention of researchers is the usefulness of mobile telephony in enhancing financial inclusion and thereby, via the finance-growth interlinkage, augmenting economic growth (Levine, 2005). Several studies have empirically examined this issue. Using cross-national data, studies have found that cellular services contribute significantly to national output (Waverman et al., 2005). In the case of India, Kathuria et al. (2009) show that mobile penetration in Indian states was associated with a positive and statistically significant improvement in output. Recently, Ghosh (2019) shows that the complementarities of mobile telephony with biometric identification is manifest primarily in case of financial access as compared with use of finance.
We explore the impact of mobile telephony on state income. Accordingly, we combine information on mobile telephony with state per capita income and financial inclusion. As for the latter, following Beck et al. (2007c), we consider six indicators: two each relating to penetration, access (deposit and loan accounts), and use (deposit-to-income and loan-to-income). For 32 states and Union Territories (excluded ones are Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep, owing to paucity of data), we normalize these indicators using a max–min strategy and take a simple average of these indicators to arrive at a financial inclusion index (OECD, 2008; Government of India, 2013). We classify states as having high or low financial inclusion (based on the in-sample median index value) and juxtapose it with (log of) state per capita NSDP and fraction of persons in the state using mobile telephony (Fr_Mobile). The evidence appears to suggest that states with higher proportion of mobile users (triangles) have higher per capita NSDP, after controlling for financial inclusion.
To further understand whether mobile telephony is a key factor driving financial inclusion, we exploit data on mobile penetration from IndiaStat and combine it with estimates of financial inclusion using the RBI database to estimate an empirical specification as in equation below for state s at time t:
where FI is the indicator of financial inclusion, represented alternately by the number of deposit and loan accounts and number of bank branches; X is a vector of state-level controls such as per capita income, education, and number of mobile network operators; μ is the state-fixed effect; and ε is the error term.4
Based on the empirical evidence presented in Table 10, the following observations can be made. First and more generally, the impact of mobile penetration on financial inclusion is quite substantial, although the effect differs across various measures. Second and more specifically, the biggest impact of mobile penetration is manifest on use and, more specifically, on the use of deposit and loan accounts (columns 3 and 4).
New Institutional Initiatives
In addition
