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Spreading JAM across India’s economy

  • steps involved in transfering a subsidy and effect of JAM
    • 1. Government must be able to identify beneficiaries
    • 2. Government must be able to transfer money to beneficiaries
    • 3. Beneficiaries must be able to easily access theirs money
      • Failure on (1) leads to inclusion errors and leakage – benefits intended for the poor flow to rich and “ghost” households, resulting in fiscal loss.
      • Failure on (2) and (3) leads to exclusion errors – genuine beneficiaries being unable to avail benefits.
  • Government → Beneficiary: the challenge of identification
    • Aadhaar’s virtue lies in using technology to replace human discretion, while keeping the system simple enough – fingerprints and iris scans – for citizens to understand.
    • one-third of all states have coverage rates greater than 90 percent; and only in 4 states—
      • Nagaland (48.9)
      • , Mizoram (38.0),
      • Meghalaya (2.9) and
      • Assam (2.4)—is penetration less than 50 per cent.
  • Government → Bank: the challenge of payment
    • After identifying beneficiaries, the government must transfer money to them.
    • Every beneficiary needs a bank account and
    • the government needs their account numbers.
      • Pradhan Mantri Jan Dhan Yojana, under whose auspices nearly 120 million
    • basic savings account penetration in most states is still relatively low – 46 per cent on average and above 75 per cent in only 2 states (Madhya Pradesh and Chattisgarh).
  • Bank → Beneficiary: the last-mile challenge of getting money into people’s hands
    • When deciding where next to spread JAM, policymakers should consider first-mile (beneficiary identification), middle-mile (distributor opposition) and last-mile (beneficiary financial inclusion) challenges.
    • JAM preparedness index suggests that the main constraint on JAM’s spread is the last-mile challenge of getting money from banks into people’s hands, especially in rural areas.
    • The government should improve financial inclusion by developing banking correspondent and mobile money networks, while in the interim considering models like BAPU—Biometrically Authenticated Physical Uptake.
      • In rural India, however, there is a serious “last-mile” problem of getting money from banks into household’s hands:
    • only 27 per cent of villages have a bank within 5 km
      •  help address this problem, the RBI in 2015 licensed 23 new banks – 2 universal banks, 11 payment banks and 10 small finance banks.
        •  Kenyan BC:population ratio is 1:172. By contrast, India’s average is 1:6630, less than 3 per cent of the Kenyan level. Kenya is more sparsely populated than India, so perhaps India needs fewer BCs. Yet still the spatial density of BC’s in India is 17 per cent the Kenyan level.
  • mobile penetration across India is strong.
    • Only in Bihar (54 per cent) and Assam (56 per cent) is penetration lower than 60 per cent.
    • India should take advantage of its deep mobile penetration and agent networks by making greater use of mobile payments technology.
    • Mobiles can not only transfer money quickly and securely, but also improve the quality and convenience of service  delivery
    • While some important changes have occurred this year to improve last-mile financial connectivity—including the Jan Dhan Yojana’s initiatives to develop the BC space and the licensing of several mobile money operators—the Bank-Beneficiary connection still appears the weakest link in the JAM chain
    •  Significant savings and efficiency gains can be achieved by transferring funds directly from the state/ central government to the worker rather than layer by layer (Centre → State → District → Block → Panchayat), with leakages along the way.
  • The first type of JAM – DBT in LPG

    • Pahal scheme,
    • directly transfers LPG subsidies into customers’ bank accounts.
    • Currently over 151 million beneficiaries receive LPG subsidies via DBT, and R29,000 crore have been transferred to beneficiaries to date
    • Household LPG is both untaxed and enjoys a universal subsidy,
      • 97 per cent of LPG is consumed by the richest 30 per cent of households.
      • Sales of subsidised domestic cylinders fell by 24 per cent when the scheme was introduced and spiked when the scheme was suspended by the UPA
    • Another reform that could further reduce LPG leakages with limited genuine exclusion is lowering the household cap from 12 to 10
    •  even the richest households—the top 10 per cent—typically do not consume more than 10 cylinders per year, so reducing the household cap will be unlikely to hurt the poor.
  • JAM for MGNREGS

    •  old MGNREGS system (and the current system for most schemes) has 4 major problems #MNREGS analysis
    • Float:
      • idle funds accrue interest costs for the central government since this is borrowed money. Outside of MGNREGS, the estimated stock of unspent balances
      • The new system keeps funds in a central pool and only disburses expenditure in real-time, reducing float by 26 per cent.
    • Leakages:
      • funds had to pass through multiple layers, meaning more people can demand a cut to secure the release of funds.
      • The new system reduced leakages by 14 per cent and fund disbursal by 38 per cent even though a household survey showed no change in the amount of work done in MGNREGA.
    • Misallocation:
      •  funds, once disbursed, usually do not return, so forecast errors lead to misallocation of fiscal resources, with idle funds in some accounts and shortages in others
    • Resource-intensity:
      • scheme managers spend valuable time haggling with officials at higher administrative units, who often demand arbitrary documentation to release funds.
    • MGNREGS is one of the government’s largest schemes, and forms 41 per cent of DBT expenditure.
  • But for the government to reach the world frontier in expenditure management, it requires a new strategic agency that is precisely the expenditure analog of the Goods and Services Tax Network—the Expenditure Information Network (EIN)—that must be created to shepherd and manage this process.
  • Where next to spread JAM?

    • First-mile
    • First-mile issues deal primarily with beneficiary eligibility and identification.
      • Targeting:
        • targeted subsidies are harder to JAM than universal programs, as they require government to have detailed information about beneficiaries.
      • Beneficiary databases:

        • The recently released Socioeconomic Census (SECC) contains information about household asset-holding and occupation
        • This information, if continuously updated, has the potential to aid targeting and serve as a baseline database for administrators in sectors where beneficiary databases do not yet exist.
      • Eligibility:
        • Some benefits are for households while others are for individuals
        • Jan Dhan is monitored at household level, while Aadhaar is an individual identifier
        •  the (typically male) recipient of a cash transfer may have different spending priorities from the (occasionally female) intended beneficiary
    • Middle-mile
      • The chief middle-mile issues are the administrative challenge of coordinating government actors and the political economy challenge of sharing rents with supply chain interest groups.
      • Within-government coordination:
      • Supply chain interest groups:
    • Last-mile
      • Last-mile issues relate to the risks of excluding genuine beneficiaries, especially the poor. These depend on two factors:
      • Beneficiary financial inclusion:
        • exclusion errors can be substantial if few beneficiaries have bank accounts and can easily access them.
      • Beneficiary vulnerability:
        • exclusion error risks increase when the beneficiary population is poorer.
        • The poorest 3 deciles of Indian households consume only 3 per cent of subsidised LPG consumption, but 49 per cent of subsidised kerosene.
  • We argue that policymakers should decide where next to JAM based on two considerations:
    • Size of leakages:
      • Subsidies with higher leakages have larger returns from introducing JAM.
      • Central government control:
        • the policy areas that appear most conducive to JAM are those where the central government has significant control and where leakages— and hence fiscal savings due to JAM—are high.
    •  two JAM options: DBT and BAPU—Biometrically Authenticated Physical Uptake.

      • With DBT, subsidies are transferred to beneficiaries in cash. With BAPU, beneficiaries certify their identity using Aadhaar and then physically take the subsidised goods like today.
      • JAM Preparedness Index –index to measure states’ preparedness to implement
        •  (i) DBT in urban areas, (
        • (ii) DBT in rural areas,
        • (iii) BAPU.
      • BAPU—Biometrically Authenticated Physical Uptake. Beneficiaries verify their identities through scanning their thumbprint on a POS machine while buying the subsidised product
        • successfully attempt by Krishna district in Andhra Pradesh, with significant leakage reductions.
        •  Fair Price Shops are equipped with POS machines, beneficiaries can simply authenticate their identities while taking their rations as under the current system.