About a year ago, the Government of India launched a Direct Benefits Transfer programme that involves transferring government benefits and subsidies directly to residents through a biometric identification system. In this Note from the Field, Varad Pande, a government official who has been closely associated with the roll-out of the programme, reviews its promise and potential.

On 1 January, 2013, the Government of India launched an ambitious Direct Benefits Transfer (DBT) programme. The programme promises to transform service delivery in India by transferring government benefits and subsidies directly into the hands of residents through a biometric based identification system (Aadhaar¹), thus speeding up payments, removing leakages, and enhancing financial inclusion.

Why is now an opportune time for a DBT system in India? The confluence of four trends – the maturing of biometric technology (which allows the technology to be applied at scale), increasing cost effectiveness of mobile devices, increased mobile penetration (over 75%), and exponential increases in cheap computing power and storage – today makes it feasible for a DBT system to be implemented in a large country like ours. It allows India to ‘leapfrog’ generations of sub-optimal service delivery systems and migrate directly to a cutting-edge system.

Why identity?

Proof of identity is the starting point in a socio-economic ladder. When attempting to access government services, the poor often have to pay a ‘poverty premium’ – in the form of harassment, bribes, delays, and often simply denial of service – because of the lack of identification documents. A verified unique proof of identity for all residents, in the first instance, aims to address this problem.

It is worth mentioning, that unlike ID projects in most countries that are introduced from a lens of national security, Aadhaar starts from the lens of social and economic inclusion, which is embedded in its core philosophy.

Aadhaar as proof of identity

Aadhaar is a biometric based identity system that was launched in India in 2010. It captures two unique biometrics of every Indian resident – fingerprints and iris (eye recognition) and assigns a unique ID number to every resident. It stores each person’s demographic and biometric data in a secure depository, and allows for real-time online verification over a simple mobile phone network. Over the last 3.5 years, Aadhaar has enrolled more than 65 crore (650 million) people – more than half the country – which makes it the largest biometric identity system anywhere in the world.

Why Aadhaar is superior to other biometric systems

Aadhaar is superior to other biometric solutions (for example, “smartcards²”) for three reasons. First, by providing a single biometric service across all government schemes, it provides uniformity of biometric standards, and ensures economy in expenditure and convenience for all residents (enrolment is needed only once, and no physical cards need to be carried around). Second, it allows for interoperability among banks and Business Correspondents (BC)3 - the same Aadhaar biometrics can be used by any bank or BC that the beneficiary may use. Third, Aadhaar provides a mobile identity that travels with the resident even when he/ she moves or migrates.

Why DBT?

The DBT programme builds on the foundation provided by Aadhaar, allowing for direct, time-bound transfers of benefits to people. DBT enables the government to transfer benefits using just an individual’s Aadhaar number – in effect the Aadhaar number becomes the financial address of every individual.

Central and state government transfers and subsidies in India today stand at about Rs. 4.25 lakh crore a year ($70 bn approx.; about 4% of India’s Gross Domestic Product (GDP)). Currently, these transfers happen through multiple intermediaries. In the process, the amount gets diminished in value before it reaches the ultimate beneficiary. Rajiv Gandhi had famously said many years ago that only 15 paise of a rupee of government spending reaches the ultimate beneficiary; studies suggest that today this has increased 50-60 paise of a rupee, still leaving a huge leakage of up to 2% of GDP every year. DBT aims to radically change this by transferring money electronically directly to the beneficiary, thereby eliminating the layers of intermediaries in the process.

Because biometrics are unique, a DBT system removes ‘duplicates’ (a name getting benefits more than once) and ‘fakes’ (benefits being taken in the name of a non-existent or fictitious name). This alone could over time, save the government up to 1.2% of GDP, which is currently ‘lost in transit’. DBT thus presents a unique ‘win-win’ for both residents and the government.

How DBT works

The starting point for DBT is that every resident has an Aadhaar number (based on biometrics). This Aadhaar number is linked to their bank account (where bank accounts don’t exist, these are opened using Aadhaar, which has now been authorised by the Reserve Bank of India (RBI) as a valid proof for opening a bank account). Entitlements and benefits are transferred directly to beneficiaries through Aadhaar-linked Bank accounts.

The last-mile is the most important – DBT enables disbursements to take place at the doorstep of the beneficiaries through a dense network BCs who make the payments using cost-effective ‘micro-ATM’ machines. Interoperable cash withdrawal stands at the heart of this scheme and is delivered through the 250,000 post office branches and 100,000 ATM’s currently existent. Added to this will be approximately 10 lakh (1 million) Aadhaar enabled ‘micro-ATMs’, and eventually this platform aims to incorporate the over 75 crore (750 million) mobile phone devices to unleash its transformational potential.

The entire system is run on an ´Aadhaar Payments Bridge’ (APB) and ‘ Aadhaar-enabled Payment Systems’(AEPS), which are now operational and can handle millions of transactions on a daily basis. The APB and AEPS provide a fully interoperable system - it ‘talks’ to all Banks, and it doesn’t matter if the banks of the payer, payee and BC are different.

It is important to note that DBT is a new ‘system’, not a new scheme. It aims to make the payments under existing government schemes reach people faster and more efficiently.

Collateral benefits of the Aadhaar-DBT system

Like the telecom revolution that had not only a direct but also a large number of indirect positive impacts, DBT has a number of collateral benefits.

• The electronic-Know Your Customer (e-KYC) service provides for instant opening of bank account through a ‘micro-ATM’ based on Aadhaar authentication – this will hugely empower the unbanked and accelerate financial inclusion, something we have been struggling with for decades. Instant e-KYC also opens up rapid access to an entire ecosystem of services to residents for which multiple proofs of identity and residency were earlier required (for example, driving license, mobile phone connections etc.)
• A vast network of BCs brings banking to the doorsteps of people in the rural poor who earlier did not have access to modern financial services, in addition to creating lakhs of jobs.
• The portability of the entire system ensures that entitlements like pensions and scholarships are delivered at one’s doorsteps. It will no more matter where in India one is located or migrates to, as authentication will be online using one’s unique biometrics.
• It provides an efficient and transparent system for transferring remittances. It is estimated that Rs. 75,000 crore ($12 bn approx.) worth of internal remittances are done every year in India, and the transaction costs (largely borne by the poor) are very high (5-15%). This will dramatically change with DBT.
• Aadhaar linkage in the databases of the government and banks databases will provide, for the first time, end-to-end transparency of subsidy and benefits payments from the government to the beneficiaries, which does not exist today.

Implementation experience

Over the past two years, promising results have been seen in pilot schemes being run in different parts of the country. These include Public Distribution System (PDS) rations in Andhra Pradesh, Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) payments in Jharkhand, and pension distribution in Andhra Pradesh, Tripura, Maharashtra and Chandigarh.

The programme is being implemented in more than 100 districts of the country already. More than 25 lakh (2.5 million) beneficiaries are withdrawing their benefits every month using Aadhaar biometric authentication. More than 7.5 crore (75 million) payment transactions have been put through until January 2014, and Rs. 4000 crore ($645 million approx.) has been transferred to more than 2.5 crore (25 million) beneficiaries. A scale-up of DBT is now underway.

The Story of Adilabad and East Godavari

Perhaps the most powerful example of the potential of Aadhaar and DBT comes from Adilabad and East Godavari districts of Andhra Pradesh, where more than 95% of the population is enrolled in Aadhaar and where the PDS rations are given based on Aadhaar authentication. PDS linkage shows that Aadhaar and DBT are not just about cash transfers – the platforms can provide the same benefits of faster, more targeted and more transparent service delivery and reduction in leakages in the case of food transfers, as they do in the case of cash transfers like pensions and scholarships.

In Adilabad, the linkage to Aadhaar–DBT has resulted in reduced leakages of about Rs. 45 crores ($7.3 million approx.) and in East Godavari of about Rs. 120 crores ($19.4 million approx.) in less than a year.

In both these districts, Aadhaar also enabled identification of duplicate and fake Liquified Petroleum Gas (LPG) connections, which were terminated, and enabled over 25,000 new rightful connections for women. Similarly, it also revealed bogus pensions amounting to Rs.10-15 crore ($1.6-2.4 million approx.) and approximately 50,000 bogus job cards under the MNREGA scheme.

Ongoing challenges

Like every transformational project, Aadhaar-DBT has its own set of challenges. First, Aadhaar-DBT requires different agencies to work together – central ministries, district officials, banks, frontline government officials etc. Enrolment into Aadhaar needs to be universalised. Existing government databases need to be digitised. Bank accounts need to be opened and linked to Aadhaar. Banks and Post Offices need to be linked into the APB and AEPS systems. Getting every link in the chain to work in tandem is a challenge that hinders rapid rollout.

Second, there are issues with technology implementation on the ground, such as ensuring foolproof fingerprint recognition, especially for manual workers and the elderly. There is also the issue of ‘connectivity’ - ensuring real-time online authentication where there is little or no mobile phone network (as in several MNREGA worksites and Panchayats).

Several other implementation issues also remain. However, as the examples of East Godavari and Adilabad show us, through dedicated and coordinated effort, they can be overcome.

Concluding thoughts

It is common conversation among policy and political circles that in India the “service delivery system is broken”, that the government is just sending more money down the same “leaky pipes”, and that until the “system is fixed”, nothing will improve. Aadhaar-DBT is a genuine, transformational effort to fix this delivery system. In fact, Aadhaar-DBT is probably the world’s largest anti-corruption programme. It is indeed an idea whose time has come. And it is time to give it our unqualified support.

Varad Pande works with the Ministry of Rural Development, and has been closely associated with the implementation of the Aadhaar and DBT programmes.

Notes:

1. Aadhaar is a 12 digit individual identification number issued by the Unique Identification Authority of India (UIDAI) to residents on behalf of the Government of India which serves as a proof of identity and residence through the country.
2. A ‘smartcard’ is a physical card (like a credit card) that has biometric data stored in it. Authentication requires verification against the data stored in that particular smartcard.
3. Business Correspondents (BCs) are essentially ‘last mile banking agents’ appointed by banks. These local bank representatives take banking to the doorstep of people in far-flung villages across the country.