Rebooting India: Realizing a Billion Aspirations (11 page)

As more people start entering the electronic payments network, they start creating a digital trail of money through their transactions which can be analysed and, based upon their size and regularity, converted into a credit score. As a result, credit can now be offered to those people who, not being in the formal system, were not deemed credit-worthy, like the many enterprising small businessmen Viral met in Dharavi. Loans, for example, can now be disbursed directly through microATMs, with instant approval, and can even be paid back through microATMs. No longer do these loans have to be under the purview of banks; any financial institution capable of analysing digital transaction data—a person’s ‘data exhaust’—can make the decision to extend credit.

Ultimately, the key principles that drove the creation of the entire Aadhaar-based payments ecosystem are universal enough to be applied to any technology-enabled solution implemented on a large scale; many of these find an echo in the design of the Aadhaar programme itself. One is to build a simple thin solution, a platform that can easily be layered on top of existing payment systems with minimal effort. Customers must have the freedom of choice, in this case being able to carry out transactions with a representative from any bank through the creation of an interoperable payments network.

The economics of the system must be such that participants find it easier to make money legitimately rather than through corruption and rent-seeking. By creating standardized and simple processes, scaling up the network to include millions of customers becomes easier. Thanks to the ‘network effect’, each individual added to the system enriches it
exponentially, creating a large enough user base that it expands under its own momentum.

And finally, all solutions must recognize and harness the energy of the Indian market. Today, we have emerged as a nation of entrepreneurs, a development that Nandan charted in
Imagining India
. We cannot afford to ignore this vast wealth of human capital. Entrepreneurs can drive innovation, while the strength of the government lies in creating infrastructure and the necessary regulation, as well as building scale. The Aadhaar-enabled payments network was designed to leverage both these strengths, using markets where possible and governments where essential, allowing each to focus on their core competence, all the while building a solution that worked for everyone.

With Aadhaar enrolments proceeding rapidly, we now have over 900 million residents equipped with an Aadhaar number ready to operate bank accounts and withdraw money; with the technology for microATMs in place, building a network of a million business correspondents to serve these potential customers is easily achievable. With the number of smartphone users expected to go up to over 500 million by 2015, we may soon see a shif t to smart phone-based payments as well.

Creating demand for an electronic payment system might have been challenging, but when the government chooses to route even a small part of Rs 3 trillion worth of social security payments through microATMs, the incentives arise automatically—the sheer scale of the numbers involved generates enough demand for the entire infrastructure to be built. Banks will set up microATM networks with a business correspondent in every village, vendors will compete on building microATM devices, and people will open accounts in a bank of their choice as multiple banks compete for their business.

The involvement of the government has converted what might have been a niche service into one that is freely available to all. Electronic payments were once considered a luxury for higher-end
bank customers; now, they have become a utility that everyone can avail of. The basic banking infrastructure that will arise in every village of India will be the engine that powers further innovation in financial services for the benefit of every citizen; it will help create a truly integrated and inclusive economy.

There are people in the world so hungry, that God cannot appear to them except in the form of bread.

—Mahatma Gandhi

KRIPA SHANKAR IS a slight, moustachioed farmer from a small village near Amethi in the state of Uttar Pradesh. When Viral met him in 2012, he was pushing his bicycle by the side of a large highway, their conversation periodically drowned out by the ear-splitting honking of trucks as they roared past. A journalist, interviewing Kripa Shankar, pointed to a bag of fertilizer perched securely on his bicycle. Like farmers across India, Kripa Shankar had bought this fertilizer at a rate far below the market value, thanks to the generous subsidy provided to farmers by the Government of India. How long did it take him to get this fertilizer, asked the journalist. He replied, ‘Twenty days! After twenty days of waiting for the fertilizer to arrive at the shop, there was a queue this morning and I waited for five–six hours. It’s probably too late for my crops now but I had no choice.’ How many bags did he need? ‘Five.’ And how many could he get? ‘Two.’ It was very likely that to get even those two bags, Kripa Shankar had to bribe the shop owner. What about his crops? ‘Brother, they’re ruined, come to my fields and see for yourself,’ sputtered the indignant man.
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Kripa Shankar is not alone in his discontent. In 2008, farmers in Karnataka, upset when they received smaller quantities of chemical fertilizers than they were entitled to, vented their ire by burning a fertilizer shop, three buses and a police vehicle. Several more buses were damaged and thousands of farmers blocked the streets. Eventually, the police resorted to beating up the protesters and firing tear gas shells in an attempt to quell the violence.
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The broken disbursement system evoking such rage in India’s farmers has its origins in our long and painful history of recurrent famines, reaching a nadir with the pre-Independence era famine in Bengal that caused an estimated 1.5 to 4 million deaths due to starvation, malnutrition and disease. Heavily dependent on the monsoon to provide irrigation for crops, and saddled with past policy failures that worsened the scarcity of essential foodgrains, an independent India resolved that improving national food security was a priority for building a strong nation. One path to this goal was to boost the nation’s agricultural productivity. Agricultural research institutes were set up across the country to build a strong scientific infrastructure for agriculture. In a further attempt to break India’s dependence on foreign food imports, eminent scientists such as the Nobel Laureate Dr Norman Borlaug and Dr M.S. Swaminathan, the statesman C. Subramaniam and others collaborated to build plant breeding programmes and irrigation development schemes that ushered in India’s Green Revolution, allowing India to finally achieve self-sufficiency when it came to foodgrains.
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The long-ranging success of this programme can be gauged by the fact that India is now neck and neck with China as the world’s leading exporter of wheat and rice.
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As food production levels began to increase, the government took a series of policy decisions to ensure that agricultural productivity remained high, guaranteeing a steady food supply to the nation—decisions meant to protect and promote agriculture that exist to this day. Seeds are supplied at subsidized prices. The government has made substantial investments in large irrigation projects so that ample water can be provided at subsidized rates. Subsidized power is used to pump
water for irrigation. Heavy subsidies on the manufacture and sale of fertilizers have made them both cheap and ubiquitous. Agricultural output also falls under this protectionist mantle; the government is one of the largest buyers of foodgrains and it sets the prices for procurement, assuring the farmer that there will always be a buyer for his crops. To some extent, these measures have been effective. India has weathered more recent episodes of poor rainfall and low crop yields without the masses descending into starvation.

Farmers are not the only ones to benefit from government subsidies. Around the world, governments provide subsidies for such commodities as food and fuel. India recently passed the National Food Security Act, designed to provide subsidized foodgrains to nearly 820 million people, almost two-thirds of the country’s population.
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Social security pensions, unemployment benefits and health and disability insurance are part of the safety nets created by governments to support the vulnerable and underprivileged.

All told, the Government of India annually spends nearly Rs 3 trillion on schemes involving direct cash transfer and subsidies. That’s almost 3.5 per cent of the nation’s GDP—enough money to lift nearly every household in India over the poverty line. Over 100 million farmers benefit from agricultural subsidies, over 120 million households receive subsidized LPG, a cooking fuel, and a network of nearly 500,000 fair price shops dispense food and kerosene at subsidized rates to about 180 million families every year.
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As an attempt to eradicate social inequities and provide equal access to essential commodities, the inherent fair-mindedness of such systems cannot be denied. But, as Nandan has argued in
Imagining India
, the distribution system for subsidies is hopelessly broken. The government haemorrhages money while millions of Kripa Shankars across the country receive a fraction of the benefits they are entitled to. Grain rots in warehouses while the poor go hungry; although India has one of the biggest grain stockpiles in the world, and even exports some of it to countries like Saudi Arabia and Australia, one-fifth of the Indian population remains malnourished.
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When these distribution systems fail, they hit precisely those people with the least resources
to weather the storm on their own. Farmers in Karnataka set fire to buses; in Tunisia, a poor street-food vendor harassed by the police set fire to himself instead, triggering the Arab Spring revolutions in the process. While Mohamed Bouazizi was protesting police brutality, underlying the complex web of events that brought nations to the brink of civil war was a rise in food prices;
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heavily dependent on foreign imports, these countries were deeply vulnerable to spikes in world food prices that the subsidies provided by their governments could not absorb.

The two major problems that have crippled public distribution networks are the inability to provide targeted services and a lack of transparency. Citizens lack both control and information at every step. Lists of intended beneficiaries are riddled with errors of inclusion and exclusion. Ghosts, fakes and duplicates are siphoning off supplies while corruption and regulatory procedures have raised the entry barriers so high that many of the truly deserving are left out in the cold. An opaque network means that the movement of goods from supplier to the consumer cannot be traced; stockpiling and hoarding of goods can neither be caught nor prevented. A lack of choice means that consumers are forced to purchase goods from a single supplier or fair price shop, creating monopolies in the market. A dual pricing system in which goods can be purchased at an artificially low price and subsequently sold at the prevailing market rate provides opportunities for arbitrage and market distortions. Analyses carried out as part of the 2015 Economic Survey reveal that rich households benefit disproportionately from multiple subsidies, while the poor for whom they are truly meant continue to struggle. The good intentions that birthed the idea of subsidies as a social safety net have long since been lost in a witches’ brew of inefficiency, corruption and a blinkered world view that clings to outmoded systems past their shelf life.

Whether the government should be providing subsidies at all has been debated for years. At one end of the spectrum are those who feel the subsidy system should be dismantled altogether, and market forces should prevail. On the other end are those who feel the government
is actually not doing enough, and needs to increase the reach and extent of its social welfare programmes. In our opinion, withdrawing subsidies and benefits altogether is too drastic a move—many of these are the outcomes of great political bargains in our society. Instead, we advocate a hybrid system that delivers benefits to the underprivileged while also being responsive to market forces. We envision technology as its lynchpin, allowing us to do more with less—better welfare programmes that place less of a financial burden on the state. Most importantly, technology allows us to deliver subsidies directly to the citizen; instead of trying to fix the broken disbursement system that has become the Achilles’ heel of so many welfare programmes, we can eliminate it altogether.

Our country is in the grip of what economist Norman Myers refers to as ‘perverse subsidies’—hurting not just our economy, but our environment as well.
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While subsidy reform may have an immediate economic impact, in the long run it also offers us a chance to develop a new class of environment-friendly policies. As we over-fertilize our fields, deplete our water tables, chop down our forests, demand more coal and fossil fuels to power our industries and our vehicles, pollute our rivers and poison our air, it’s a chance we cannot afford to let slip.

The subsidy economy operates under a set of distorted rules that bear little relation to the rough-and-tumble world of the open market. In an open market, the scarcity of a particular commodity is signalled by a price rise and the market usually responds accordingly. Faced with an increase in onion prices, a housewife might simply choose to buy fewer onions or none at all until the prices stabilize. If fertilizers are expensive, farmers will use them sparingly. In the closed, artificial system created by subsidies, these market forces are no longer in effect, with harsh consequences.

Let’s look at fertilizers first. Subsidies keep prices low, and farmers use them lavishly; according to World Bank data, India’s usage of
fertilizers outstrips that of the US.
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This is a massive environmental problem, because fertilizer overuse—that of urea in particular—has the paradoxical effect of reducing soil quality and decreasing crop yields. While urea supplies plants with nitrogen, an essential nutrient, it must be added as part of a balanced fertilizer mix that includes two other essential nutrients, potassium and phosphorus; add too much of one and too little of the other, and crop growth is affected. Urea is a subsidized fertilizer, while others are not, which helps to explain the skewed balance of fertilizer usage. An agricultural development officer in the state of Punjab, traditionally considered India’s breadbasket, complains that ‘a farmer will become bankrupt, but he will not stop using urea’, likening it to an addiction. Unable to comprehend why their crop yields are falling, farmers are dumping more urea onto their increasingly sickly-looking fields and unwittingly worsening the problem.
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Our dwindling water resources are a second concern. The government gives farmers power subsidies, making it cheap to pump water for irrigation. With little incentive to be prudent, farmers can afford to pump far more water than they actually need. Satellite measurements of groundwater tables have recorded a steady annual drop, and farmers now have to dig ever deeper bore wells to find water for their crops.
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According to these studies, 54 per cent of India faces ‘high’ to ‘extremely high’ water stress, and groundwater levels in northern India are ‘more critical than anywhere else on earth’.
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The bulk of agricultural subsidies end up benefiting farmers with medium to large holdings who can afford to pay the market price; poor and landless labourers, the lowest on the agricultural totem pole, gain little or nothing from such policies. The 2015 Economic Survey further explores these misdirected subsidies—fertilizer subsidies, for example, largely benefit manufacturers rather than consumers. The poorest 20 per cent of Indians consume far less power than their richer counterparts and thus profit less from power subsidies. The bulk of water subsidies are allocated to private taps, whereas the public taps that most poor households draw their water from remain unsubsidized.
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Agricultural produce is also artificially insulated from the normal market rules of supply and demand. The government buys grain at a fixed price, benefiting the farmer but driving up costs for everyone else. The previous government budgeted a staggering $19 billion (over Rs 1 trillion), nearly half of its entire subsidy spend, on closing this price gap.
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When farmers are given price support for crops like rice and wheat, they tend to over-cultivate these at the expense of other, non-supported crops. Agricultural patterns become skewed and the supply–demand equation goes out of whack, adding to price inflation.

When this closed system meets the open market, the consequences can be severe. Farmers used to obtaining a guaranteed price for their produce are ill-equipped to deal with the vagaries of the open market. They are further crippled by government policies designed to prevent hoarding and control inflation, such as banning exports and preventing farmers from selling their produce directly to private buyers. The rising price of foodgrains and vegetables is a perennial sore point, and the cost of the humble onion has become a rallying cry capable of bringing down governments. It is a sad testament to the failure of our agricultural policies that farmer suicides, driven by crop failure, debt and sheer desperation, continue to make headlines to the present day.

Perverse incentives operate in case of fuel subsidies as well. The subsidies for petrol and diesel were dismantled very recently, but their effects continue to linger. At its peak, diesel in India was a whopping 32 per cent cheaper than petrol, thanks to which 53 per cent of passenger vehicles sold in India over the 2014–15 fiscal year were diesel-powered, compared to a miniscule 3.2 per cent in the US.
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It’s still common to see luxury Mercedes sedans running on diesel in India. Just as common is the sight of a vehicle parked outside a restaurant as an employee unloads cylinder after cylinder of domestic LPG, obtained illegally because, of course, domestic LPG is subsidized while commercial LPG is not. The same domestic LPG also powers autorickshaws, since auto LPG is not subsidized either. There’s a lot of money to be made in exploiting these loopholes; according to
one estimate, 37 per cent of all domestic LPG consumers are ‘ghosts’, fake accounts created by buyers and distributors.
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