February 23, 2018
Governments since antiquity have tried to offer some level of welfare to the poor and these programs have expanded in modern times to truly large proportions. For instance, the supplemental nutrition assistance program (SNAP) in America costs approximately $71 billion a year (In 2016-17, GoI DBT payout was approx. 7.54 billion). Reducing the cost of administering these programs and increasing their effectiveness (by better targeting, eliminating fraud and corruption, reducing the number of intermediaries) has been a key challenge for all governments.
The use of technology has improved benefit administration considerably. We have gone from expensive paper tokens (US food stamps printed at the mint to minimize fraud) to electronic transfers straight to the beneficiaries’ bank account (India’s Direct Benefit Transfer scheme).
India’s implementation of Direct Benefit Transfer (DBT) has been a big step in eliminating a lot of the waste of earlier forms of benefit distribution. It not only reduces administration cost but by leaning on Aadhaar, the DBT system reduces both types of fraud – of ‘duplicates’ (a name getting benefits more than once) and of ‘fakes’ (benefits being taken in the name of a non-existent or fictitious person). These features alone make DBT far superior to other forms of benefit transfer.
Despite the tremendous strides by DBT in eliminating waste, the system suffers from three important drawbacks.
1. Cash Flow Issues For Beneficiaries
While DBT has reduced the need for intermediaries, it has added cash flow burden for the end-beneficiary. So, for instance, in PAHAL (DBT for LPG), the customer has to first purchase the LPG cylinder and then the rebate is remitted to the bank account. This creates a cash flow burden for the beneficiary, which the Government has realized and is addressing through a new scheme – Ujjwala. However, creating new schemes creates new layers of awareness building and administration requirements.
2. Reliance on the Banking Network
Bill Gates famously said: Banking is necessary. Banks are not. However, the current DBT system has banks baked into its core as the system cannot work if the beneficiary does not have a bank account. The success of schemes like Jan Dhan Yojana notwithstanding, it is worth asking if this reliance on banks is a good thing.
We would argue that it is not. There are real costs to using the banking infrastructure and it creates opportunities for banks to profit at the expense of poor customers. While not an issue yet in India, this has been a major challenge in the United States – where banks have been charging customers to even query their balance.
Furthermore, the cost of operating a bank account is estimated to be $5 per annum. Hence, the 310 million new accounts of the Jan Dhan Yojana cost about $1.5 billion to operate annually. Banks already finding ‘novel’ ways of paying for this cost – for example, by reintroducing the penalty for non-maintenance of minimum balance in its savings accounts. State Bank of India Chief Arundhati Bhattacharya said the public sector lender needs funds to balance the operational costs of Jan Dhan accounts.
3. Lack of Ongoing Transparency
For certain schemes, verification and transparency remain a challenge. For instance, schools are required to admit a certain number of backward and disadvantaged students. However, according to one study, seats are left empty owing to multiple inefficiencies: burden placed on parents, long enrollment process, schools disinterest in enrolling such students, and debt accrued owing to missing refunds. Furthermore, auditing and monitoring of these student enrollments in itself is a burdensome process for the government.
Lastly, one of the findings of the policy is that there needs to be constant monitoring to ensure outcome-based benefit transfer to align incentives of all stakeholders.
Similar verification and monitoring challenges exist across other welfare schemes as well.
Blockchain is the underlying technology of Bitcoin, the famous cryptocurrency. Now, Bitcoin has had some regulatory problems, but if the underlying technology is used correctly, it offers real benefits and the ability to take welfare payments into the 21st century. Fundamentally, blockchain enables programmable money – a concept that can transform the provision of welfare.
Broadly, programmable money allows for payments to be made only if certain conditions are met. For example, you can trigger payment if and only if the purchase is related to an LPG cylinder. This allows the creations of tokens (like the original food stamps in the US) that can only be used for a specified transaction and their usage generates a fully transparent and real time audit trail. The beauty here is that these tokens cannot be copied as they are cryptographically generated.
Most importantly, by using blockchain technology, the need for a bank account at the beneficiary level is obviated. The beneficiary only needs a phone and Aadhaar number. As discussed above, this would be major cost saving for the banks and a cash-flow win for the end beneficiary. This would also simplify benefit distribution in rural areas.
Let’s evaluate how this could be implemented in practice.
PAHAL has been a hugely successful DBT program. However, currently, the beneficiary is required to pay for the cylinder and then the subsidy is paid to her bank account. She then needs to go to an ATM to access her funds.
The diagram below shows the current system in operation:
In a blockchain-based system, this delay in paying subsidy and need to visit the ATM would be eliminated. The diagram below shows how the system would work:
The token is a digital code that will be sent to the end consumer’s mobile phone number. This digital code will be tagged to the Aadhaar number using a mathematical hash function, thereby making every digital code unique to the Aadhaar number. The reconciliation is automated using the blockchain technology as both the government agency issuing the tokens and the oil companies redeeming the tokens are using the same distributed ledger.
The diagram clearly shows how the redesigned model using tokens is an improvement owing to simplification compared to the current as is model. In summary, the benefits are as follows:
Multiple banking transactions (from the government to consumers) are replaced by a handful of transactions (from the government to oil companies).
Tokens are tagged to individual Aadhaar numbers, hence reconciliation is exponentially simplified.
All transactions – issuance and redemption of tokens – are stored using the blockchain technology, thereby providing transparency and audibility.
The same concept can be expanded to any DBT system. Exact token features and blockchain features will differ from case to case, but at the heart of it, they remain the same.
Governments like the UK are already experimenting with blockchain-based benefit transfer. In India, due to Aadhaar, we have the opportunity to be a leader in the blockchain space as well. It’s time to bring benefit payments to the 21st century and for India to lead that implementation.
Author’s note: all views expressed are personal.
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