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Eco. Survey - Vol 1 - Ch.3 Spreading JAM Across India?s Economy
Large-scale, technology-enabled, real-time DBTs can improve economic lives of India's poor, and JAM Trinity? Jan Dhan,
Aadhaar, Mobile?can help govt implement them.
In 2015, JAM spread at an astonishing rate?
Jan Dhan : creating 2 million accounts per week
Aadhar : 4 million accounts per week.

+several mobile money operators were licensed.
PAHAL scheme of transferring LPG subsidies via DBT.
Scheme reduced leakages by 24% + excluded few genuine beneficiaries.
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.

Main constraint = last-mile challenge of getting money from banks into people's hands, especially in rural areas.
Govt should improve financial inclusion by developing BC and mobile money networks, while in interim considering models like
BAPU?Biometrically Aunticated Physical Uptake.
At present, most promising targets for JAM = fertilizer subsidies and within-govt fund transfers?areas under significant central
govt control and with substantial potential for fiscal savings.

Background
Cash transfers can directly improve economic lives of India's poor, and raise economic efficiency by reducing leakages and
market distortions.
Implementing DBT at large-scale and in real-time = key objective, and significant progress has been made in past year.
INGREDIENTS OF JAM
Suppose govt wants to transfer 1000 to every Indian tomorrow. What would that require ?
Govt must identify beneficiaries
+Transfer money to beneficiaries
+Beneficiaries must be able to easily access its money

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Govt must be especially sensitive to exclusion errors. Govt ? Beneficiary : Challenge of Identification To identify beneficiaries. ~1/3rd of all states have coverage rates >90%. Ghost and duplicate names crept in ? Leakage Aadhaar's virtue lies in using technology to replace human discretion. Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. resulting in fiscal loss.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT Failure on (1) leads to inclusion errors and leakage ? benefits intended for poor go to rich and ?ghost? households.4)?is penetration <50%.ProfProjects.9). Comparing reach of Jan Dhan with that of Aadhaar suggests that unbanked are more likely to constrain spread of JAM than unidentified. govt needs databases of eligible individuals. basic savings account penetration in most states is still relatively low ? 46% on average and above 75% in only 2 states (MP and Chattisgarh).~120 million accounts created in 2015 But still. 975 million individuals now hold an Aadhaar card ? over 75% of population and ~95% of adult population Aadhaar penetration is high across states. Thus. Failure on (2) and (3) leads to exclusion errors ? genuine beneficiaries being unable to avail benefits. but accuracy and legitimacy have been hampered by administrative and political discretion involved in granting identity proofs like BPL cards. and only in 4 states?Nagaland (48. policymakers need to be cognizant about exclusion errors due to DBT not reaching unbanked beneficiaries.0).This page was exported from . Meghalaya (2. Govt ? Bank : Challenge of Payment After identifying beneficiaries. while keeping system simple enough ? fingerprints and iris scans ? for citizens to understand. Mizoram (38. 210 million Aadhaar cards were created in 2015. at an astonishing rate of over 4 million cards per week. govt must transfer money Every beneficiary needs a bank account and govt needs their account numbers.com | Page 2/10 | . ? PMJDY .9) and Assam (2. driving licenses and voter IDs. Beneficiary databases have existed long before Aadhaar.

financial literacy remains a concern. mobile penetration = strong. restarting and modifying a program that UPA govt had begun and suspended. over 151 million beneficiaries receive LPG subsidies via DBT. so perhaps India needs fewer BCs. India's preparedness against a country where last-mile financial inclusion is considered good?like Kenya. Only in Bihar (54%) and Assam (56%) is penetration <60%. By contrast. Box 1 : while MGNREGS has introduced DBT for paying workers' wages. ? RBI in 2015 licensed 23 new banks ? 2 universal banks. Mobiles can transfer money quickly and securely + improve quality and convenience of service delivery.000 crore have been transferred to beneficiaries till date. inform beneficiaries that food supplies have arrived at ration shop or fertiliser at local retail outlet. Kenyan BC : population ratio is 1:172. Currently. First type of JAM ? DBT in LPG PAHAL scheme directly transfers LPG subsidies into customers' bank accounts. ~1.com | Page 3/10 | .ProfProjects.4 million agents or service posts to serve ~1010 million mobile customers in India. Contrast with India's mobile operator penetration is instructive. Kenya is more sparsely populated than India. While last-mile financial connectivity has improved in 2015. Signifcant savings and efficiency gains can be achieved by transferring funds directly from state/central govt to worker rather than layer by layer (Centre ? State ? District ? Block ? Panchayat).g. India should take advantage of its deep mobile penetration and agent networks by making greater use of mobile payments technology. even though 97% of LPG is consumed by richest 30% of Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. India's average is 1:6630. E. Amount and Variants of JAM >20% of India's population received a cash transfer from govt in FY14-15.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT Bank ? Beneficiary : Last-mile Challenge of Getting Money Into People's Hands In urban areas. JAM was involved in distributing benefits across a range of govt programs?from education and labour schemes (scholarships and MGNREGS) to subsidies and pensions (NSAP). Household LPG is both untaxed and enjoys a universal subsidy. JAM remains incomplete.This page was exported from . 11 payment banks and 10 small fnance banks. Current govt launched PAHAL scheme in late 2014 and early 2015. but Bank-Beneficiary connection still appears weakest link in JAM chain. and 29. with leakages along way. a ratio of about 1:720. In rural India = serious ?last-mile? problem of getting money from banks into household's hands : only 27% of villages have a bank within 5 km.

cannot access subsidy under JAM arrangement. Reduced sales of domestic cylinders do not merely reflect exclusion errors ? lower consumption by genuine beneficiaries who do not have bank accounts and therefore. Based on prices and subsidy levels in 2014-15. with DBT in place. Households buy at market prices and have subsidy credited into their bank account within 3 days.5% (Bihar) over-and-above domestic LPG.com | Page 4/10 | . Before DBT scheme was introduced. Lessons from LPG experience Previous consumers of black market cylinders?such as commercial establishments?are forced by introduction of DBT to buy commercial cylinders. lowest compliance rates are for those with largest prior consumption of LPG cylinders. But. A permanent advance was made by govt to reduce household liquidity constraint issues. If exclusion was high among poor. However. these cylinders are still 30% cheaper than commercial cylinders due to differential tax treatment of household and commercial LPG.This page was exported from . potential annual fiscal savings of PAHAL is estimated to be 12700 crore in a subsequent FY. Impact of introducing and suspending DBT in LPG : Sales of subsidized domestic cylinders fell by 24% when scheme was introduced and spiked when scheme was suspended by UPA. Commercial LPG sales increased when DBT was introduced and fell back when DBT was suspended. Why ? Sales of non-subsidized domestic cylinders shot up. These are likely to be ghost households now denied ? JAM in LPG has succeeded in reducing leakages rather than excluding poor. groups who consume least LPG should have lowest DBT compliance rates.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT households.ProfProjects. While households can buy only 12 subsidized cylinders a year. But effect is surprisingly small (6%). Commercial establishments are ineligible for subsidy and must pay market prices plus central and state taxes of about 30% on average. Now. households could buy LPG cylinders at subsidised prices (~Rs 430). This violation of One Product One Price Principle provides strong incentives for distributors to create ?ghost' household accounts and sell subsidised LPG to businesses in black market. PAHAL had a similar impact : a 27% reduction in sale of subsidized cylinders. govt identifies beneficiaries by linking households' LPG customer numbers with Aadhaar numbers = eliminate ?ghost' and duplicate households. Economic theory would predict reduction in black market supply would increase black market prices. they can buy an unlimited #unsubsidised cylinders. Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. Latter is subject to customs and excise duties of 13% and state taxes of between 5% (Assam) and 20. But black market prices spiked by ~30% in districts where DBT was introduced.

and govt employees rely on govt transfers for their salaries. Reducing cap could signifcantly reduce this leakage. Similarly. Even richest households typically do not consume >10 cylinders per year.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT This is a second violation of One Product One Price principle and creates another source of leakage?a shortfall of tax revenue in this case rather than excess subsidy burden. disbursals were based on forecasted expenditure. All receive funds from same govt source that delivers subsidies ? and which JAM can improve by reducing delays. + as well-known ?March problem' in LPG. businesses working with govt rely on timely payment to manage cash flow. distributors have strong incentives to invoice unconsumed subsidized cylinders to households and resell them in black market. and administrative burden. Because March is end of fiscal year. Why should govt. ? spike in March consumption (January and December consumption are high because households use LPG for heating during winter months). Output as PDF file has been powered by [ Universal Post Manager ] plugin from www.ProfProjects.This page was exported from . and funds sat idle in local govt accounts till expenditures were incurred?though MGNREGS has reformed its system at national level following an August 2015 cabinet note. most other govt schemes still follow old system. Lowering household cap from 12 to 10 could further reduce LPG leakages with limited genuine exclusion. Experimenting with JAM for MGNREGS expenditure in Bihar between 2011 and 2013 In old system. so reducing household cap will be unlikely to hurt poor. use JAM for its bread-and-butter functions ? Poor households rely on govt subsidies to buy certain commodities. leakages.com | Page 5/10 | . state and local govts rely on central transfers to fund key programs.

ProfProjects. once disbursed. New system reduced leakages by 14% and fund disbursal by 38% even though a household survey showed no change in amount of work done in MGNREGA. MGNREGS = one of the largest schemes. Leakages Funds had to pass through multiple layers. estimated stock of unspent balances in govt accounts is at least Rs.com | Page 6/10 | . Similarly. Float Idle funds accrue interest costs for central govt since this is borrowed money. Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. it is overcoming these challenges. 2. Outside of MGNREGS. Where next to spread JAM? 3 categories : first-mile. = require devt of IT systems and strong coordination under auspices of CGA. ? scheme shortages for beneficiaries in some panchayats. even if a neighbouring panchayat has available but unused funds. who often demand arbitrary documentation to release funds. New system keeps funds in a central pool and only disburses expenditure in real-time. Resource-intensity Scheme managers spend valuable time haggling with officials at higher administrative units.1 lakh crore and leads to an annual cost of 8500 crore. Misallocation Funds. But it requires a new strategic agency that is precisely expenditure analog of G&S Tax Network? Expenditure Information Network (EIN)?that must be created to shepherd and manage this process. 4. Targeting : targeted subsidies are harder to JAM than universal programs. and forms 41% of DBT expenditure. making monitoring difficult. Similar gains are possible by adopting these reforms for all govt payments. usually do not return. both internally and for vendors.This page was exported from . reducing float by 26%. First-mile Issues = beneficiary eligibility and identification. as they require govt to have detailed information about beneficiaries.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT old MGNREGS system = 4 major problems : 1. businesses must haggle with programme managers and face arbitrary requirements to receive payments. so forecast errors lead to misallocation of fiscal resources. Reform eased burdens in doing business with govt. middle-mile and last-mile. Through fund mgmt reforms. with idle funds in some accounts and shortages in others. 3.

Food & Public Distribution and all states' Public Distribution Departments. Most states have now digitised their PDS. E. all households are eligible.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT Subsidies targeted at poor require govt to know people's wealth.ProfProjects.g. Recently released Socio-Economic Caste Census (SECC) contains information about household asset-holding and occupation status.This page was exported from . Thus. Jan Dhan is monitored at household level. Some benefits are for households while others are for individuals. such as OMCs that distribute LPG subsidies. LPG subsidy is universal. = doubly important because of the way resources are usually allocated within households : recipient of a cash transfer may have different spending priorities from intended beneficiary. Customer IDs can then be seeded with Aadhaar and bank account information and mobile numbers. Coordination in this setting is signifcantly easier than in kerosene. Some subsidies have more streamlined adm've arrangements than others. 3 Oil OMCs and network of distributors it manages. where Union Petroleum Ministry must coordinate with Union Ministry of Consumer Affairs. while benefits targeted at farmers or pregnant mothers require govt to know beneficiaries' occupation and pregnancy status By contrast. LPG subsidy merely requires coordination between Union Petroleum Ministry. Limited progress in getting Fair Price Shops in PDS to adopt Point of Sale (POS) machines for biometric authentication is Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. while Aadhaar is an individual identifer. Eligibility : Household-individual connection = Issue. Middle-mile Chief middle-mile issues are administrative challenge of coordinating govt actors and political economy challenge of sharing rents with supply chain interest groups. NFSA provides for subsidised grain to households but a cash transfer maternal entitlement to mothers. Within-govt coordination : Ministries and state govt departments share authority in administering subsidies and transfers. Beneficiary databases : Govt needs a database of eligible individuals.com | Page 7/10 | . This information has potential to aid targeting and serve as a baseline database for administrators in sectors where beneficiary databases do not yet exist. Some subsidy distributors have beneficiary lists in digital form. LPG was first subsidy where DBT was introduced! Supply chain interest groups : Agents along a commodity's supply chain can obstruct spread of JAM if their interests are threatened.

fertilizer retail outlets and other distributors to remain viable. and thus distributors need incentives before they invest in JAM infrastructure. With BAPU.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT suggestive of such resistance. Returns from pursuing JAM in other areas depends on size of leakages in those sectors. Subsidies with higher leakages have larger returns from introducing JAM. Last-mile Issues = risks of excluding genuine beneficiaries. Hold-up power of groups within subsidy system is an example of Indian's economy exit problem. but 49% of subsidized kerosene. but in rural areas physical connectivity to banking system remains limited. and political challenges in bringing supply chain interest groups like Fair Price Shops on board with DBT. With DBT. subsidies are transferred to beneficiaries in cash. 2 factors : Beneficiary financial inclusion : Exclusion errors can be substantial if few beneficiaries have bank accounts and can easily access Bank account penetration is growing. Central govt control : When introducing JAM. policy areas that appear most conducive to JAM are those where central govt has signifcant control and where leakages are high. 2 JAM options : DBT and BAPU.ProfProjects. A subsidy's share of rural consumers is thus a rough proxy of level of beneficiary financial inclusion. Beneficiary vulnerability : Exclusion error risks increase when beneficiary population is poorer. beneficiaries certify their identity using Aadhaar and then physically take subsidised goods like today. Profits are required for FPS. Rents must be shared.com | Page 8/10 | . Poorest of Indian households consume only 3% of subsidised LPG consumption. policymakers will confront administrative challenges in coordinating central and state govt departments.This page was exported from . Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. Based on these considerations. Where and how to JAM ? 2 considerations : Size of leakages : JAM signifcantly reduced leakages in LPG and MGNREGS with limited exclusion of poor.

like Bihar and Maharashtra.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT JAM Preparedness Index Index to measure states' preparedness to implement : DBT in urban areas DBT in rural areas Table 6 shows indicators used to construct various indices : Because each condition is necessary and none on its own is suffcient. our index is not average but minimum of respective indicators. Rural DBT preparedness index adds an additional indicator : BC density as a ratio of Kenyan level. Using minimum is a way of highlighting binding constraints along JAM chain. like MP and Chattisgarh. Urban DBT index. with an average of 3% and a maximum of 5% (Haryana). while BC networks develop and mobile banking spreads ? Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. There is signifcant variation across states. have scores of only about 25%.com | Page 9/10 | . What can be done to reduce leakages in meantime. Binding constraint = basic bank account penetration?paying beneficiaries is issue. Others. We use Kenya as a benchmark ? intuitively as 100% level ? because it is a country where banking agent networks appear to be functioning relatively well in rural areas. Some. ? last-mile financial inclusion is main constraint to making JAM happen in much of rural India.This page was exported from . Jan Dhan's vision must truly succeed before much of India can JAM. not identifying them. DBT rural preparedness scores are signifcantly worse than urban scores. show preparedness scores of ~70%.ProfProjects.

3 Models like BAPU offer prospect of lower leakages without risk of exclusion errors.This page was exported from . beneficiaries can simply authenticate their identities while taking their rations as under current system. MGNREGS : delivering within-govt transfers via JAM can help other CSSs reduce idle funds. To this end. Despite financial inclusion scores being low. = being successfully attempt by Krishna district in Andhra Pradesh. states should be incentivised by sharing fiscal savings from DBT. it should incentivise states to : invest in first-mile capacity (by improving beneficiary databases) deal with middle-middle challenges (by designing incentives for supply chain interest groups to support DBT) improve last-mile financial connectivity (by developing BC and mobile money space). Chattisgarh (42%) and MP (27%) ? that with some policy push could be well-prepared for BAPU in near future. if Fair Price Shops are equipped with POS machines.ProfProjects. Regulations governing remuneration of BCs may need to be reviewed to ensure that commission rates are sufficient to encourage BCs to remain active.edwitty Export date: Thu May 5 6:53:43 2016 / +0000 GMT BAPU : Beneficiaries verify their identities through scanning their thumbprint on a POS machine while buying subsidised product?say kerosene at PDS shop. In those areas where centre has less control. Broader spread of JAM Considerable work needs to be done to fully implement JAM agenda. centre should prioritise areas where it has highest control over first-and middle-mile factors and leakages are high. lower corruption and improve ease of doing business with govt. JAM agenda is currently jammed by last-mile challenge of getting money from banks into beneficiaries' hands. Meanwhile.com | Page 10/10 | . but there are some states ? like Andhra Pradesh (96%). with significant leakage reductions. Centre can invest in last-mile financial inclusion by further improving BC networks and promoting spread of mobile money. Fertilizer and within-govt transfers stand out as good candidates. and therefore merit serious consideration. Output as PDF file has been powered by [ Universal Post Manager ] plugin from www. especially in rural India. BAPU preparedness is much better than for Rural DBT preparedness. Recent licensing of banks will help. Average state preparedness is 12%.