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INDIA’s J.A.M. SCHEME

JAN DHAN, AADHAAR, MOBILE PHONE

India’s J.A.M. scheme is the silent revolution that has changed the lives of

hundreds of millions of low-income families in the country. Through financial inclusion, unique identification and increased mobile connectivity, it has

empowered the Indian masses to avail of various government subsidy and pension benefits, without being forced to rely on corrupt intermediaries.

Rolled out by the Narendra Modi-led government in 2014, this scheme recognizes

the crucial role of unique identification cards and technology in the banking sector. It faced many challenges in its implementation initially but it has

completely changed the lives of the poor – with a corresponding reduction in subsidies as a percentage of GDP due to elimination of middlemen.

This study aims at providing an insight on the J.A.M. initiative of the government

and assess its challenges, impact, and benefits across India.

ANYA GUPTA

Standard 12

The Cathedral & John Connon School

May 2019

May 2019

How The J.A.M. Scheme Transformed The Lives Of Millions Of Low-Income Indians

ACKNOWLEDGEMENTS I would like to take this opportunity to thank Ms. Rohini Malkani (Global Sovereign Ratings Analyst - DBRS, a globally recognized credit ratings agency founded in 1976; former Chief Economist – Citigroup India) for first seeding this idea and encouraging me to do this project, as well as guiding me on key focus areas in the J.A.M. scheme. LIST OF ABBREVIATIONS USED

J.A.M. Jan Dhan, Aadhaar, Mobile PAHAL Pratyaksh Hanstantarit Labh (LPG subsidy scheme) PMJDY Pradhan Mantri Jan Dhan Yojana (Prime Minister’s Public Money Scheme) SSA Sub Service Area BC Business Correspondent UIDAI Unique Identification Authority of India AADHAAR Aam Aadmi Ka Adhikaar (Right of the Common Man) UPI Unified Payments Interface NPCI National Payments Corporation of India BHIM Bharat Interface for Money CPI Corruption Perceptions Index NABARD National Bank for Agricultural and Rural Development ITR Income Tax Returns PAN Permanent Account Number DBT Direct Benefit Transfer

* Please note that the exchange rate used for converting Indian Rupee figures to US Dollars throughout in this report is Rs70/$

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INDEX

1. Preface…………………………………………………………………... 5 2. The J.A.M. Scheme……………………………………………………....7 3. Objectives ……………………………………………………………......8 4. Learning from South Africa’s Mzansi Account……………………….....10 5. Evolution of the J.A.M. Scheme

a. Jan Dhan Bank Account……………………………………..11 b. Aadhaar.…………………………………………… …….....14 c. Mobile………………………………………………………..16

6. Demonetisation and the J.A.M. Scheme…………………………………18 7. Benefits of the J.A.M. Scheme…………………………………………..20 8. Challenges Before Implementing the J.A.M. Scheme…………………...23 9. Overcoming Challenges Involved in J.A.M.…………....………………..25 10. Conclusion………………………………………………………………..27 11. Bibliography and References…………………………………………..…28

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1. PREFACE Raju Sattamsetti is a 52-year-old man living in Mumbai, and works as a security guard in my residential apartment complex. He receives a salary of Rs 25000 (roughly $360) per month. Until last year, he did not have a bank account, had only a basic mobile phone as he could not afford a smartphone, and his only official identity was through a ration card (a government issued card used for buying subsidised food grains).

Fig.1. Raju Sattamsetti (security guard in Mumbai) with his wife and children His wife and children stay in a rural village in the southern Indian state of Telangana, which is an 18-hour drive from Mumbai, and he only visits them once or twice a year. As the sole income-earning member of the family, he has to send money home quite often. He was forced to send cash either through some informal agency or with some acquaintances travelling to his village. However, they would charge a very high transaction fee and there was also no accountability and often his family would not receive the money or get it quite late or not the entire amount. Given Raju’s low income, he is entitled to many benefits from the Indian government – such as subsidised food, cooking gas, sugar, etc. However, he had to go to his village to avail of such funds and then too he received them only after paying an unofficial commission to the government or village-level intermediaries who distribute such government subsidies. Raju’s story is not a unique one – hundreds of millions of people in India faced similar problems when the J.A.M. scheme was initiated in 2014 under the NDA Government headed by Prime Minister Narendra Modi. Now, after the J.A.M. scheme (Jan Dhan-Aadhaar-Mobile), our security guard Raju has the following: (i) a bank account (called a “jan dhan” account) (ii) a nationally recognized government identity card (called an “aadhaar” card, somewhat similar to the social security card in the US), and (iii) a smart phone which offers mobile internet access and enables online transactions. Consequently, Raju is now able to deposit his monthly salary in a bank account, earn interest on his savings and is also able to send money via online banking portals using his smartphone

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or mobile wallet. Also, by linking his aadhaar card to his bank account, he is now able to receive the money due to him from several government welfare schemes directly, rather than through intermediaries. This paper is a study of the J.A.M. scheme – what were its objectives, how it works, what were the challenges in implementing a scheme like this in a large and complex democracy like India, how successful (or not) it has been so far, and what has been the impact of this scheme.

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2. THE J.A.M. SCHEME The J.A.M. (short for Jan Dhan-Aadhaar-Mobile) trinity is a socio-economic welfare scheme that was proposed in India’s annual Economic Survey for the financial year 2014-15, and consists of 3 components:

• J – Jan Dhan Scheme: A financial inclusion program that provides a range of banking services ranging from credit to remittance facilities

• A – Aaadhar: A unique identification number for Indian citizens on the basis of demographic and biometric information (somewhat similar to the US social security number)

• M – Mobile phone number: Linking mobile numbers to bank accounts and aadhaar numbers to eventually facilitate mobile banking

According to a McKinsey report in 2011, simply connecting every Indian household to an automated digital payment system for government unilateral transfer payments could save upto $22bn, 80% from leakages. The J.A.M. scheme aimed to harness that potential by integrating technology into the banking system. Although aadhaar was launched in 2009, the conditions were not conducive for its effective implementation as it did not offer any practical use other than as a source of identity, and the poor did not receive the subsidies due to them even if they got an aadhaar card. However, the J.A.M. scheme successfully managed to accelerate aadhaar enrolments and integrate it with digital banking in order to enable the poor to receive direct benefit transfers rather than have it exist simply as a social security number. In 2014, a majority of India’s rural population was financially illiterate and had no access to formal financial services which not only resulted in them being exploited by informal agencies, but also hindered the overall economic growth of the country. They were thus unable to receive the benefit due to them under various Government subsidy schemes. Hence, the J.A.M. scheme was envisioned as a way to link hundreds of millions of bank accounts, with an equal number of mobile phone users who were to be identified using their aadhaar cards.

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3. OBJECTIVES OF THE J.A.M. SCHEME: The J.A.M. scheme was launched on 28th August, 2014 with the following objectives:

• Directly linking the government ministries to various welfare scheme beneficiaries with the purpose of eliminating corrupt intermediaries (thereby reducing “leakages” in the welfare delivery mechanism)

• Improve welfare and standard of living in rural parts of the country by providing government benefits directly to the rural poor and increasing financial literacy

• Reduction of fiscal deficit through lower spending on subsidies (as there would be less “leakage”), improvement in the sovereign credit rating - thereby reducing interest rates, increasing investment and boosting GDP

• Transforming India from a cash-based economy to a digital economy • Strengthening financial delivery mechanisms by setting up banking and other

formal credit institutions all across the country • Development of soft infrastructure (banking, national ID system, mobile internet

access) whose benefit will accrue for many years to come and will not get dismantled easily

• Employment generation in the financial services and technology communications sector

• “Financial-isation” of savings of the poor – Familiarising India with the concept of depositing savings in a bank account that earns interest, rather than buying gold – thereby reducing India’s overall demand for gold and gold imports.

Fig.3.1. Worldwide Unbanked Population (Globally and in India)

Source: World Economic Forum

79%

21%

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Global Unbanked Population – 2bn, of which 21% (420mn) were in India

Global Unbanked Population – 1.7bn, of which 11% (190mn) were in India

2014

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Some key Indian Government schemes that are covered under the J.A.M. scheme • LPG Subsidy Scheme [Pratyaksh Hanstantarit Labh (PAHAL) Yojna]

Under the PAHAL Yojna, LPG subsidies are directly deposited into the bank accounts of beneficiaries. At present, more than 146.2mn people are receiving direct cash subsidies. It has also helped identify and block around 33.4mn duplicate or inactive accounts, thus saving billions of rupees. The PAHAL Yojna recently entered the Guinness Book of World Records for being the world’s largest direct cash transfer scheme.

• Prime Minister’s Accident Insurance Scheme [Pradhan Mantri Suraksha Bima Yojna] Under this scheme, accident insurance worth Rs200,000 (~US$2860) is being provided. The premium is just Rs12 p.a. (US$0.17) for each member that means even the poorest of poor Indian can afford it.

• Prime Minister’s Life Insurance Scheme [Pradhan Mantri Jivan Jyoti Bima Yojna] This scheme provides life insurance at just Rs330 (US$4.7) per year payable to the family of the member in case of his death due to any reason. Almost 30mn people have joined Pradhan Mantri Jivan Jyoti Bima Yojana.

• Pension Scheme [Atal Pension Yojana] Being a guaranteed pension scheme, it provides a pension of upto Rs5000 (US$71.4) a month depending on the contribution. Around 1.58mn people have registered for the Atal Pension Yojana.

Clearly, the J.A.M. scheme was a bold attempt by the Indian government to improve the quality of life of hundreds of millions among the poor, which would also have the benefit of reducing the strain on government finances by eliminating middlemen in the process of distribution of such welfare benefits.

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4. LEARNING FROM SOUTH AFRICA’s MZANSI ACCOUNT: One of the biggest inspirations for the J.A.M. scheme was the prevalence of international financial inclusion programs in other developing countries that improved the financial sector and banking infrastructure there. For example - what’s interesting is that India’s situation in 2014 was similar to that of South Africa’s in 2004. South Africa had a GDP of $229bn in 2002, just slightly higher than those of its neighbouring countries. The chart below shows that less than half the South African adults had access to banking infrastructure. It was also found that only 24% of the lowest income -segment of the population (with the lowest standards of living) were formally banked. The South African Government introduced the Mzansi account that was a basic bank account with remittance services, that catered to the low-income segment of the population. Interestingly, it was implemented mostly by private commercial banks rather than government banks who simply did not have the reach and network. It has features similar to India’s Jan Dhan scheme such as financial literacy camps and general accessibility targets. As of 2008, the financial inclusion scenario had improved sharply owing to this scheme. South Africa’s economy was now much more advanced than its neighbours.

Fig.4.1. South Africa’s population (in %) with access to a bank account Source: www.finmark.org While the success that the Mzansi initiative enjoyed in terms of financial inclusion and access to banking served as a guide for India’s Jan Dhan scheme, the aspects that did not work also served to teach India important lessons. For example, a major shortcoming of the Mzansi initiative was that most of these accounts remained dormant after opening, thus reducing the impact that it could potentially have had.

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5. EVOLUTION OF THE J.A.M. SCHEME The J.A.M. scheme consists of 3 main components – bank accounts (Jan Dhan), unique identification (aadhaar) and mobile connectivity.

a. JAN DHAN (Public money) BANK ACCOUNTS Status of financial inclusion before the launch of the Jan Dhan scheme: Although the Indian economy was experiencing rapid growth at over a 7% annual rate during the 2000s, it had not included a major part of the country – the rural masses – and a large part of the population remain unbanked. In the financial year ended March 2014, there were only 383,804 banking outlets (bank branches, business correspondents and other modes) in villages in the country. Despite large parts of the country being rural, only 14.6% of ATMs were located in rural villages. Hence, the banking infrastructure catered largely to the urban segments of the population and left a large rural segment that represented untapped potential. All 600,000 villages in India were divided into smaller components called sub - service areas (SSA) where banking institutions and bank representatives called Business Correspondents (BC) serve 1000-1500 households. Dividing the bank branches geographically also enabled more efficient implementation. The bank branches provide credit, remittance, insurance and pension facilities to account holders. The Jan Dhan (‘Public Money’) scheme was initiated in three phases: PHASE 1 15 August 2014 –

14 August 2015 • Financial literacy campaigns organized • Setting up of accessible bank branches and Business

Correspondents • All households covered with at least one basic bank

account and given a RuPay Debit Card • Households provided with universal access to bank

accounts linked to various direct benefit schemes

PHASE 2 15 August 2015 – 14 August 2018

• Micro finance and insurance • Provide account holders with overdraft facilities of

upto Rs.5000 (~US$72)

PHASE 3 Beyond 14 August 2018

• Bank accounts opened for every adult (instead for just every household)

• Overdraft limit to be raised to Rs.10000 (~US$145)

Benefits of a Jan Dhan Bank Account:

• Can be opened with a zero balance (no minimum balance required) • Interest allowed on deposits • Life insurance cover of Rs30,000 (~US$430) allowed on death of beneficiary, and

accidental insurance cover of Rs100,000 (~US$1430) • Government scheme beneficiaries will get direct subsidy transfers • Account holder provided with a RuPay Debit card (Indian version of debit card

issued by the National Payment Corporation of India) • Overdraft facility of up to Rs5000 (~US$72)

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There was a big push from India’s Ministry of Finance which resulted in a sharp improvement in the banking account penetration in the very first year itself.

Fig. 5.1.1. Banking Account Penetration (%) after Jan Dhan scheme in 2014 Source: World Economic Forum

Fig.5.1.2. Number of Branches of Scheduled Commercial Banks Source: Reserve Bank of India Since then, under the Jan Dhan scheme, 336.6 million bank accounts had been opened as of December 2018. In 2014, The Guinness Book of World Records certified that the “most bank accounts opened in one week as part of the Financial Inclusion Campaign is 18,096,130 and was achieved by the Department of Financial Services, Government of India.” Not surprisingly, given the push from the Indian government, the maximum number of Jan Dhan bank accounts were opened by the government-owned public sector banks such as the State Bank of India and Punjab National Bank which enjoy a share in the total balance at Rs791.77bn (US$11.3bn). The Regional Rural Banks (RRB) and the commercial banks have a share of the total balance at Rs176.48bn (US$2.5bn) and Rs29.26bn (US$418mn) respectively.

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Fig. 5.1.3. Status of New Bank Accounts Opened Under the Jan Dhan Scheme

Source: Ministry of Finance, Government of India The latest data reveals that the scheme has reached a total balance of Rs997bn (US$14bn) and has 355 million beneficiaries eligible for government subsidy and other schemes. Of the 355 million beneficiaries, 188 million of them are women which shows how Jan Dhan has empowered rural women to take an active part in the financial ecosystem.

Fig.5.1.4. Number of Bank Accounts Opened in Rural India (‘000s)

Source: Reserve Bank of India To summarize, the government’s drive to open Jan Dhan accounts has seen good success so far and many of these accounts are now being used relatively more regularly as well.

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b. AADHAAR – A UNIQUE IDENTITY NUMBER SCHEME AADHAAR stands for “Aam Aadmi ka Adhikaar” (which means “rights of the common man”) and was launched on 28th January 2009 with the objective of empowering Indians with a unique identity and protecting the rights of government subsidy scheme beneficiaries. Most poor people who did not have official identity would not be able to avail of subsidy schemes meant for them and were often exploited by corrupt intermediaries. Some others would use fake or duplicate identities and enjoy more benefits than what they were actually entitled to. Individuals are issued a 12 digit unique identification number by the Unique Identification Authority of India (UIDAI) which serves as a proof of identity. It is required by citizens to avail of benefits from Government welfare schemes. An individual’s aadhaar card contains his/her demographic information (such as name, address, gender, date of birth etc.) and biometric information (photograph, iris scan and fingerprint) which is also stored in a centralised database.

Fig.5.2.1. Sample AADHAAR card With AADHAAR, the right beneficiary gets the intended government benefit and “ghosting” or fraudulent use of government subsidies is prevented.

Fig. 5.2.2. Age Group and Gender-wise AADHAAR Enrolments (%) (2018)

Source: Unique Identification Authority of India (UIDAI)

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In terms of the J.A.M. scheme, it is compulsory for an individual’s AADHAAR number to be linked to their bank account in order to receive subsidy for LPG connections and food grains under the Public Distribution System. This move allowed the Government to save Rs.150bn (~US$2.2bn) in 2014-15 itself by removing fake and duplicate LPG connections. Despite the Supreme Court’s decision to disallow the government’s move to make aadhaar cards mandatory for all Indian citizens, as of 30th April 2019, the UIDAI reported that there were 1236mn aadhaar cards issued across India which corresponds to a penetration rate of 91% based on the projected population of 1354mn by year-end.

Fig.5.2.3. Cumulative AADHAAR Enrolments 2018-19 Source: UIDAI (Unique Identification Authority of India) Although AADHAAR was launched in 2009 its benefit was not fully realised until 2014, when as a part of the J.A.M. scheme it managed to link beneficiaries with the Government to enable direct benefit transfer, something that it had not been able to do as it just served as a social security number with no practical use. Clearly, despite the setbacks and various challenges in its implementation in its early years, AADHAAR has now become the world’s largest biometric ID system.

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c. Mobile The Indian government realised that to make the financial ecosystem efficient it was important to integrate technology with banking services. To create a mobile banking platform, it introduced mobile wallets in 2012. India’s central bank - the Reserve Bank of India – also authorised three telecom giants (Airtel, Vodafone and Idea) to establish this service. Commercial banks have increasingly began accepting this form of various digital transactions. There were approximately 640 million mobile phone users (2015) in India, of which 170 million were smartphone users. India is expected to have over 810 million mobile phone users by the end of 2019, with smart phones jumping to 317mn. This sets a great platform with adequate critical mass to create a mobile banking environment.

Fig. 5.3.1. Expansion of Mobile Phone and Smartphone users 2014 2015 2016 2017 2018 2019e

Mobile Phone Users (mn) 581.1 638.4 684.1 730.7 775.5 813.2 % of Population 47% 51% 54% 57% 60% 62%

% Change 10.7% 9.9% 7.2% 6.8% 6.1% 4.9% Smartphone Users (mn) 123.3 167.9 204.1 243.8 279.2 317.1 % of mobile phone users 21.2% 26.3% 29.8% 33.4% 36.0% 39.0%

% Change 62.1% 36.2% 21.5% 19.5% 14.5% 13.6% Source: eMarketer Mobile phone penetration in India is expected to further rise to 85% by 2025 from current levels of 62%. The Indian telecom industry is highly competitive and the entry of a new player in 2016, Reliance Jio - which drove prices down to as low as zero for voice services – shook the industry. It now has the largest market share and has caused competitors to either quit or merge due to mounting losses. Reliance Jio’s competitive prices have also incentivised new – mostly low-income – consumers to enter the telecom market. This aggressive strategy led to a surge in data traffic with Indian smart phone users averaging data usage of 9.8GB/month – the highest in the world.

Fig. 5.3.2. Number of Mobile Phone Users in India (Millions) Source: Statista Digital Market Outlook Although mobile banking began in India in 2002, it has only gained popularity in the past few years. Today people can make quick, safe online payments and fund transfers through mobile applications or SMS messaging.

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Unified Payments Interface (UPI) is a modern concept developed by the National Payments Corporation of India (NPCI) that provides mobile banking facilities. In March 2019, there were 142 banks live on UPI with a monthly volume of 799.54 million transactions and a transactional value of Rs.1.334 trillion (~US$19 billion)

Fig. 5.3.3 Mobile Payment Transaction Value in India (Rs. trn) Source: The Associated Chamber of Commerce and Industry of India Under UPI, the Government of India launched the Bharat Interface for Money (BHIM) which is an online payment application that can be used to make instant money transfers. It was launched by Prime Minister Narendra Modi in 2016 to supplement the J.A.M. scheme and to boost digital transactions. The application has been accepted by 102 partnering banks and will serve to integrate technology into India’s financial infrastructure. Overall, this was the third and also a very critical component of the J.A.M. scheme, and has seen a dramatic success over the last few years. India’s mobile penetration has improved sharply in the last 5 years and more importantly the cost of using mobile telephone has fallen drastically (India now has amongst the lowest voice and data tariffs in the world), and the number of smart phone users has been increasing even more sharply.

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6. DEMONETISATION AND THE J.A.M. SCHEME As of 2019, India ranked 78 of 180 countries in terms of the Corruption Perceptions Index (CPI). Corruption is one of the biggest barriers to India’s economic and social progress. It was one of the main reasons why rural India never felt the radical improvement in quality of life as experienced by some of their urban counterparts, as dishonest intermediaries would prevent lower-income segment beneficiaries from receiving the intended benefit from various government welfare schemes. On 8 November 2016, Prime Minister Modi announced that the Rs.500 and Rs.1000 notes of the Mahatma Gandhi series would no longer be considered legal tender while also announcing the issue of new Rs.500 and Rs.2000 notes. The demonetisation move was aimed at curtailing the use of “black money” (money obtained through illegal means and/or income on which tax had not been paid) which would subsequently give the Indian economy a fiscal push. Perhaps the most understated benefit of the move was that it encouraged the development of digital economy and gave an additional boost to the J.A.M. scheme. Within a month of demonetization of high value currency, a huge amount of cash was deposited in bank accounts and hence deposits in Jan Dhan Bank accounts surged to over $11 billion. After demonetisation, customers added 82% more money to their digital wallets, that stimulated the Indian capital market. Increasingly traders and merchants have begun to accept payment through online payment apps like PayTM, PhonePe and other mobile wallets. Such a move helped to complement the objective of the J.A.M. scheme by encouraging online mobile banking rather than traditional cash transactions. Fig.6.2. Deposits (Rs bn) under the Jan Dhan Scheme after demonetization (8th Nov 2016) Source: Reserve Bank of India

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Villagers from Chandrapur, Maharashtra, wait in line to deposit cash into their bank accounts

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The above chart demonstrates the surge in bank deposits a day after the demonetization scheme was announced, on 9th November 2016. The effect of the move greatly increased the flow of funds in the economy even a year after it took place. Hence its effect was not temporary, but was sustained successfully.

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7. BENEFITS OF THE J.A.M. SCHEME India’s J.A.M. scheme is proving to be a silent revolution that is changing the daily lives of hundreds of millions of poor people across the country. The following are some of the main benefits of the J.A.M. scheme: (i) Financial Inclusion: Financial inclusion of the lower-income classes involves not only the opening of Jan Dhan Bank accounts but also getting them to use such accounts regularly to obtain credit, cash transfers, mobilise savings, remittance and other facilities. According to Census 2011, only 57.8% of all households in India, and 54.4 % of rural households availed of banking services. The setting up of the J.A.M. scheme created the necessary infrastructure for bank branches to be set up across all 600,000 villages in the country.

Fig.7.1. India’s Unbanked Population (mn) – Sharp decline from 2014 to 2017 Source: World Economic Forum; World Bank’s Global Findex Report (ii) Direct Benefit Transfer To Intended Beneficiaries, Eliminating Middlemen: Although the government had initiated various subsidy and pension schemes targeted at the rural population below the poverty line, they would often not receive the intended benefit because of corrupt intermediaries. To make the transfer leak-proof, setting up of bank accounts and unique identity numbers proved beneficial as it directly linked the Government to the beneficiary. It has strengthened financial delivery mechanisms by preventing individuals of availing of benefit more than once or receiving undue benefit. The Indian government reported that it transferred Rs333bn (US$44.76bn) in subsidies directly to the poor in the financial year ending March 31, 2019. Cumulatively, from 2014-15 to 2018-19, the Indian government said it had transferred Rs7.23trn (US$103bn) in subsidies directly to the bank accounts of the poor. (iii) Improved Standard of Living for the Poor: The Indian government now offers 439 subsidy schemes, including rural employment guarantee, cooking gas, health insurance, scholarships, etc. All of these now come under the

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ambit of direct benefit transfer (DBT). In 2018-19, about 590mn individuals benefited from the government’s DBT schemes. Since the J.A.M. scheme allowed direct electronic transfers, beneficiaries along low-income segments of the population could actually enjoy the entire subsidy amount rather than just a proportion of it. By opening and regularly using bank accounts they could avail of various banking facilities such as interest, loan and remittance services. Financial literacy programs inculcated healthy financial habits such as savings. Many rural villagers who would keep cash stored at home now deposited it in the banks and could earn interest on these deposits. By receiving mobile phones under the J.A.M. scheme they could use online payment portals to make instant, safe fund transfers while also use it for other purposes such as communication, recreation etc. (iv) Move From A Cash-Based To A Digital Economy: Lack of confidence displayed towards digital payment by rural Indians is one of the primary causes for India being a cash-dependent economy today despite moves such as demonetisation. Through financial literacy camps and gradual simplification of online payment structures, people are realising the importance and benefit of transitioning from cash to digital payment options. (v) Infrastructure Development: • Banking Infrastructure in Rural Areas: For years, India’s banking sector has been

concentrated in major urbanised cities and had excluded many rural parts of the country. For this reason, the benefit of rapid growth in the financial sector had not percolated down to them. Under the J.A.M. scheme, for the first time, growth in banking infrastructure is being advanced in all geographical parts of the country through organised Sub Service Areas and Bank Correspondents.

Fig.7.2. Number of Banking Outlets in Villages (Total)

Source: Reserve Bank of India • Social Infrastructure: Before AADHAAR, India did not have a strong social security

system. By developing a well-planned social security system, many Indians are now benefiting from several Government schemes.

• Physical Infrastructure: A major reason why rural India could not keep up with

technological changes was due to lack of access to major physical infrastructure. Under the J.A.M. scheme, a conscious effort is being is made to erect telecom towers in order to provide access to data services in all parts of the country.

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(vi) Fiscal Deficit Reduction through Reduced Leakages in Providing Subsidies Establishing a direct connection with several scheme beneficiaries, without relying on intermediaries, has led to immense savings for the Government. This has not only helped reduce its fiscal deficit, but also led to an increase in credit rating, encouraging foreign investors to invest in India. This in turn has boosted the country’s GDP. Moreover, it has reduced the burden of the common Indian taxpayer by increasing Government spending and increasing overall transparency in the system.

Fig.7.3 Cumulative Savings from Direct Benefit Transfers

Source: IBEF (India Brand Equity Foundation); Government of India

Fig.7.4 Year-over-year Percentage Change in Central Government Subsidies

Source: Ministry of Finance, Government of India

This is clearly the icing on the cake – not only is the Indian government delivering more subsidies to its genuine intended beneficiaries among the poor segment of the population, it is also saving money by eliminating middlemen who were earlier taking away a large share of such subsidies.

Ministry Department Scheme Cumulative savings upto March 2018 (Rs. bn)

Petroleum and Natural Gas

PAHAL (LPG subsidy) 422.75

Food and Public Distribution

PDS (Public Distribution System) 297.08

Rural Development MGNREGS (Mahatma Gandhi National Rural Employment Guarantee scheme), NSAP (National Social Assistance Programme)

167.03, 4.39

Minority Affairs Scholarship Schemes 1.59 Social Justice and Empowerment

Scholarship Schemes 2.38

Others Others 11.21 TOTAL Rs900.13bn (US$13bn)

22.725.7

18

1 1.42.3

1.40

5

10

15

20

25

30

2012 2013 2014 2015 2016 2017 2018

May 2019


8. CHALLENGES BEFORE IMPLEMENTING THE J.A.M. SCHEME Despite the good intentions behind the J.A.M. scheme, it faced many challenges in its implementation in its early stages. India is a large vibrant democracy with many state governments having their own way of doing things which are often not aligned with the central government’s policies. In addition, the bureaucracy at both the central and state government level has often killed the most well-intentioned schemes in the past. The following were some of the main challenges faced by Indian policymakers in implementing the J.A.M. scheme: (i) Difficulties in identification of beneficiaries (First Mile Challenge):

There was no reliable database that the government could use to determine beneficiaries for various schemes. This allowed manipulation of the system and unfair use of benefit. For example, it was difficult to identify the intended beneficiary for a subsidised LPG connection without an aadhaar card. In addition, there is the problem that many villagers are ignorant of the welfare schemes they are eligible for and without an aadhaar card, the government also does not know whom to reach out to for informing about its welfare schemes. Hence, the government tried to make the aadhaar card mandatory for everyone. However, in response to complaints against this decision (due to concerns over right to privacy), in September 2018, India’s Supreme Court upheld the constitutional validity of the Aadhaar scheme but imposed some restrictions on its use. The Supreme Court held that while aadhaar would remain mandatory for filing of income tax returns (ITR) and allotment of Permanent Account Number (PAN), it would NOT be mandatory to link aadhaar to bank accounts and telecom service providers cannot seek linking of aadhaar for mobile connections.

This makes it difficult for the government to identify beneficiaries for its various schemes as there are still many who do not have an aadhaar card.

(ii) Challenges involved in money transfer to beneficiaries (Middle Mile Challenge):

Large parts of the country remain unbanked even today. Although there are bank branches and banking correspondents (BCs) present all across rural India, this is only on paper and most of them are not operative. Due to massive financial illiteracy, many villagers do not own or actively operate bank accounts. Instead they rely on informal channels, where corrupt intermediaries charge abnormal transaction fees, effectively leaving beneficiaries with a very small proportion of the amount due to them.

May 2019


Fig.8.1 Percentage of Indians Availing of Banking Services

Source: Department of Financial Services, Government of India (iii) Setting up of Simple, Accessible Banking & Mobile Infrastructure (Last Mile

Challenge): Perhaps the biggest implementation flaw of the J.A.M. scheme was the challenge involved in transferring the money from the bank accounts into the hands of the beneficiaries. In rural villages, due to scattered population, the closest bank branch is typically too far away to use regularly. Only 27% of rural villages have a bank branch within 5 kilometres. Although the vision behind the scheme was good, it was implemented when the banking infrastructure at the state, district and municipal level was not strong enough to ensure its success. This still needs further improvement in the coming years.

Hence, an integral component of the J.A.M. scheme was to promote the use of mobile phones not only for online banking but also to improve quality of life through increased connectivity and accessibility. However, most of rural India was unprepared for a digital revolution. Many villages did not receive data coverage as telephone towers had not been constructed there and it would take many years to develop that infrastructure. J.A.M. targets many people who are below the poverty line and cannot afford even a basic mobile phone. There has been no effective government scheme to provide mobile phones or even subsidise them, which thus made the transition to a digital economy relatively more difficult.

(iv) Lack of awareness of government subsidy schemes: One of the biggest flaws associated with the J.A.M. scheme’s vision initially was that it only focused on the supply side and not enough was done to stimulate customer confidence. Although there are certain financial incentives such as overdraft facilities and insurance cover, either many people were not aware of it or still preferred traditional means of receiving subsidy or credit. Poor past experiences with Government schemes deters many from getting involved.

30.1

49.5

35.5

54.4

67.8

58.7

0

10

20

30

40

50

60

70

80

Rural Urban Total

Census 2001 Census 2011

May 2019


9. OVERCOMING CHALLENGES INVOLVED IN J.A.M. The J.A.M. scheme was a determined effort by the new Indian government led by Prime Minister Modi who was elected to power after the May 2014 national elections. Political will in implementing the J.A.M. scheme despite many hurdles was the main driver. For example, when banks were told to open many no-frills Jan Dhan accounts for the poor, there were howls of protest that this was a waste of time and efforts as the poor would not use banking facilities and that such accounts were unprofitable for the banks. However, the scheme was pushed through over-ruling such objections from the banks. Apart from political will, there were many other steps taken by the government to ensure a successful implementation of the J.A.M. scheme:

1. Higher commissions were allowed to business correspondents (BCs) to strengthen

the rural banking infrastructure as well as generate employment for villagers.

2. There are 600,000 villages across India. To ensure maximum coverage of the J.A.M. scheme across them, banking infrastructure aimed to cover them according to households and population density rather than simply geographically. Many people could not access bank branches or BCs easily as they were either too far away or were not operative.

3. As most of rural India was still not financially aware or even literate, the process of opening and using a bank account was made as simple as possible, in order to make the Jan Dhan scheme a success.

4. The scheme would only be able to complete its objective of financial inclusion, not only if people open bank accounts, but also when they start using them regularly. To encourage their usage, the Government provided some financial incentives (see next section).

5. An integral component of the J.A.M. scheme, mobile phones had not yet reached the hands of every Indian. Many of those who did have mobile phones, only had basic versions that were not compatible with online payment software, thus defeating the purpose. To overcome this, the Government could have subsidised mobile phones for people with income below a certain amount, to promote mobile banking. However, that would have cost the government a lot of money and could have strained its fiscal position. Hence, it chose to not provide a subsidy but instead encouraged more aggressive competition in the telecom sector which saw the rapid rise of new telecom providers such as Reliance Jio, and consequent sharp declines in voice and data tariffs as well as in costs of smartphones.

May 2019


Fig.6.1. Share of Mobile Users with SmartPhones (%)

Source: Statista Digital Market Outlook

6. To promote financial involvement, the Government encouraged the set-up of local

micro finance and micro credit institutions, albeit informal, in rural areas. These are helping to inculcate healthy financial habits such as savings.

7. In recent years, the government has tried to reduce costs for cashless or digital

transactions. It has waived service taxes on digital transactions upto Rs2000 (US$28.5) and has asked banks to waive charges on transactions upto Rs1000 (US$14.2) done through online/mobile banking.

Clearly, the J.A.M. scheme will continue to evolve and will likely widen its reach further in the coming years.

21.2

26.329.8

33.436

39

0

5

10

15

20

25

30

35

40

45

2014 2015 2016 2017 2018 2019

May 2019


10. CONCLUSION

The J.A.M. scheme was the first of its kind to ever be implemented in a large country like India and is probably one of the most impactful socio-economic reforms to ever be introduced. This has not only transformed the lives of millions of Indians across India, but also provided the perfect impetus to the Indian banking sector through the financial inclusion of the lower income classes. By directly linking the Government to subsidy scheme beneficiaries it has not only prevented fraudulent practices, but saved a lot of important resources. The social benefit has been massive – it has ended the exploitation of several poor Indians, improved financial literacy and promoted the establishment of several micro finance organisations in rural areas. Going forward, the challenges lie in continuing the rollout of the J.A.M. scheme to eventually reach all of India’s low-income individuals. India’s banking and technology infrastructure is still not strong enough to complement the growth of this scheme, so that needs to be further built out. It is also a scheme with a long gestation period and only offers a partial solution to the problem of financial inclusion. However, one of the biggest risks with J.A.M. and its associated ability to enable Direct Benefit Transfers (DBT), is that of future national election campaigns being fought on the basis of promises by any political party to deliver even greater amounts of government subsidies if it were to win an election. This may result in fiscally irresponsible leaders coming to power and using an efficient DBT mechanism to deliver goods to the poor and attain popularity in the short term but possibly risking India’s fiscal situation. In my opinion, despite such risks, the J.A.M. scheme is increasingly becoming more relevant as the rapid growth of technology is reshaping the Indian economy. Today, several Indians like Raju (the security guard referred to in the preface of this report) can feel the difference in their everyday quality of life, standard of living and have welcomed these technological reforms with open arms. Thus, the J.A.M. scheme - a topic not adequately covered by the mainstream media - has slowly but surely, revolutionized India’s digital landscape forever (for the hundreds of millions of people in India’s lower-income segment) while ensuring the equitable progress of millions of rural Indians. In the 4 years from 2014-15 to 2018-19, the Indian government reported that it had transferred Rs7.23trn (US$103bn) in subsidies directly to the bank accounts of the poor. This year, it is estimated that over 600mn people will benefit from direct benefit transfers of government subsidies directly into their bank accounts this year. The best part is that the Indian government’s spending on various subsidies has fallen from 4.2% of GDP in 2014-15 to 2.4% in 2018-19.

The J.A.M. scheme in India has been a huge success in my view and will likely be emulated by many other emerging economies in the years to come.

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