Tuesday, November 2, 2010

E-payments can help govt save 1L cr a yr: McKinsey

An estimated annual savings of around Rs 1,00,000 crore makes a compelling case for the government to make a one-time investment of Rs 60,000-70 ,000 crore to build an electronic payment platform for all its transactions with individual households, says consulting firm McKinsey . 

Such a platform could help the government save Rs 71,000 crore a year, while benefiting individual beneficiaries to the tune of Rs 26,200 crore. Many of the beneficiaries would be from financially excluded households as most of the transactions between the government and households relate to welfare schemes, the consultancy said in a report Inclusive growth and financial security: The benefits of e-payments to Indian society released on Monday. 

The cost of building the e-platform is prohibitive, but benefits far outweigh the costs, as it would enhancing the efficiencies of the payment system by reducing leakages, increased the efficiency of delivery of services and lower administration costs. Leakages account for about 75-80 % of the losses that the government suffers due to the manual payment system, while share of transaction cost is estimated at 15-20 % of the losses, says the report. 

A National Rural Employment Guarantee Scheme worker loses as much as Rs 6-7 in wages and travel costs to redeem the Rs 100 she earned for a day’s work. The saving of Rs 1,00,000 crore is equivalent to about 10% of the total payment flow between the government and households, considering that in 2008-09, such payments in form of direct cash transactions, subsidies and public services such as education and healthcare amounted to Rs 13,30,000 crore. 

Savings would be maximum on welfare schemes such as targeted public distribution system and national rural employment guarantee programme where the government could save as much as Rs 82,700 crore, as payment inefficiencies are 30% or more. (See table) The savings of Rs 1,00,000 crore is equal to 20% of the fiscal deficit or 25% of the government’s welfare spending. The amount is enough to meet the entire expenditure on Sarva Shiksha Abhiyan, the universal primary education programme, or double the outlay for fertiliser subsidy. 

However, the most significant gain from an e-payment platform in a country of 80-100 million poor households would be in the form of financial inclusion. 

“An e-payment platform would enable the formal financial sector to more easily and efficiently reach disadvantaged Indian households and offer modern financial products,” the report says. But getting to a point where the government can make this saving requires all its departments and agencies to be fully networked to ensure that all information transfer is electronic. It would require installation of accessible and convenient transaction points, with one in every village. 

The government would also need to ensure reliability of payment by making the system tamper-proof. This would require installation of identity authentication infrastructure, especially at payment points that serve the poor, illiterate and rural sections of India. 

That apart, the e-payment investment can be made viable only if the financial service providers and intermediaries align themselves as stakeholders in the set-up . The government would also need to ensure that the infrastructure created is put to use. This would entail transfer of all salaries is done electronically, and use of cash and cheques is eliminated. Similarly, all payments to vendors and contractors would have to be made electronically.