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Benefits of a national identity system

January 22, 2009 12:32 IST
India does not have an effective safety net for its most vulnerable citizens. Half of India's children suffer from malnutrition and are growing up stunted and underweight.

Many of them do not go to school and most do not complete their education. Those who do complete their school education often do not have the money to go to college. Our elderly poor are equally vulnerable. Old age, malnutrition or disease make it difficult for them to work even on a daily wage basis.

Fortunately, modern-day technology enables us to deliver assistance where it is most needed. We can help our most vulnerable groups through a direct cash transfer programme linked to a national identity system. India's powerful IT and telecom capabilities can be used to end hunger and ignorance.

All our governments have sought to address the terrible plight of our poorest children and elderly. We have an alphabet soup of programmes, schemes, and policies to deliver assistance to these vulnerable groups.

From Integrated Child Development Services to the Antyodya Anna Yojana to the National Mid-Day Meal programme, we have tried many different programmes to help the poor.

However, hundreds of well-researched studies have shown that these programmes have had only limited impact. Our efforts have been hampered by four major problems: (1) leakage and diversion of benefits by intermediaries; (2) exclusion of the most vulnerable groups by other, more powerful groups; (3) poor supply chain management leading to wastage and spoiling; and (4) inadequate funding. Simply put, India's safety net is meagre and has been ripped apart by thieves.

Many developing countries have created and operate highly successful safety nets for their most vulnerable citizens. The Mexican Oportunidades and Brazilian Bolsa Familia (family stipend) programmes are widely considered to be effective safety nets.

In 2007, Oportunidades reached close to five million Mexicans (about 25 per cent of the population) and Bolsa Familia reached 11.1 million Brazilian families, or more than 46 million people, representing about 25 per cent of the population.
The Brazilian programme provides about Rs 500 per month per child to poor families. The money is given to the female head of the household through a debit card that is issued by the government-owned savings bank. The stipend is only given if children are vaccinated and go to school. Additionally, all very poor families are given a monthly stipend of Rs 1,500 per month. The total cost of the Bolsa Familia programme is about 0.5 per cent of Brazilian GDP.

Careful evaluation of these and other effective schemes has shown that any well-designed programme must succeed on five dimensions: identification of target groups, registry of individuals, payment conditions to trigger necessary behaviour change, delivery of payments, and implementation monitoring.

Each of these activities can be greatly enabled by an efficient national identity system. Such a national identity system must provide a unique, biometric-based identity to each Indian citizen through a smart card and be linked to a bank account. Note that the Bolsa Familia programme is also based on a national identity system.

A national identity system and a linked payment processing platform would take about four-five years to implement.

While implementing this system, we should simultaneously roll out various direct cash transfer programmes. There are several benefits to rolling out both initiatives at the same time. First, the registration and identification process for the national identity system and the transfer programmes can be done together.

Today, most below-poverty-line (BPL) families already carry a BPL card. Antyodya Anna Yojana families also carry a card. These families can identify themselves during the national identity system registration process and be tagged as BPL individuals.

Second, we can tie together the national identity cards with appropriate conditions for receiving cash transfers.  For instance, 850,000 Anganwadi centres already provide counseling and nutritional aid to mothers and young children. Each Anganwadi centre could be equipped with terminals for an automated attendance system.

Each mother would swipe her card through this terminal to log her weekly presence. The system would check monthly attendance and then deposit the cash in her bank account.

The money would then be available for her to withdraw or use in shops equipped with payment terminals. Similarly, school and college students could be provided with monthly stipends that are paid only if they attend school or college.

Third, the national identity card will ensure efficient cash delivery directly to the individual, thereby preventing leakage.

Cards will be secured through biometric identification and a password (just like any ATM card). Individuals will be able to go to any shop or facility that is equipped with a payment terminal and pay for their transaction.

Smart cards do not need to be linked into a wireless network all the time; they can maintain balances on their memory chips and need to be topped off periodically by being connected to a wireless network.

Finally, monitoring and management of this payment system is best achieved by building multiple private sector payment processing platforms.

The government should obviously track eligibility and fund the system; however, the actual payment processing can be done by independent companies. In fact, major financial services institutions are probably best equipped to manage and operate these payment processing platforms.

How much would all this cost? At an installed cost of about Rs 300-400 for each national identity card, the national identity system would cost between Rs 40,000 crore (Rs 400 billion) and Rs 50,000 crore (Rs 500 billion)  to implement over five years for the entire Indian population.

The annual cost of running it would be about Rs 10,000 crore (Rs 100 billion). If the government gave Rs 500 per child per month to each BPL family (roughly 25 per cent of all children), the cost of this cash transfer programme would be about Rs 75,000 crore (Rs 750 billion), which is about 1.5 per cent of GDP.

Similarly, a Rs 1,000 per month stipend to every college student in India (assuming 12 million students in college), would cost Rs 15,000 crore (Rs 150 billion) or 0.3 per cent of GDP. Finally, a pension programme granting Rs 1,000 per month to every single person over 60 (about 100 million people) would cost Rs 117,000 crore (Rs 1170 billion) or about 2.2 per cent of GDP.

India's subsidies and poverty reduction programmes today run at about 3-4 per cent of GDP. Surely, we can move away from wasteful and ineffective subsidies to direct cash transfer programmes? 

These types of programmes will create a powerful safety net for the poor that will enable massive investments in human capital. A national identity system with a linked direct cash transfer programme must therefore be on top of the next government's agenda.

The author is managing director of Courage Capital Management, a global investment firm. These are his personal views.

Jayant Sinha
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