Modi's Jan Dhan Yojana is a game-changer, winner in subsidy reform

By any standard, the Pradhan Mantri Jan Dhan Yojana (PMJDY) is an extraordinary achievement for the Narendra Modi government. In just over five months, the scheme has extended banking to almost every single household in the country – with the new accounts adding up to nearly 116 million, and the government claiming that 209 million of the country’s 210 million households are now covered by banking. What then accounts for the gap of 94 million between the 210 million total households and the PMJDY’s 116 million, which reportedly covers 99.74 percent of the eligible households? The answer is simple: the rest are already covered. According to Reserve Bank of India (RBI) data, as at the end of March 2014, Indian commercial and rural banks had 243 million basic savings bank deposit accounts (BSBD) – 126 million through bank branches and the rest through business correspondents. Add 243 million to 116 million (359 million), the number credibly covers all households. Even if you think some of the PMJDY accounts are fictitious or duplications and triplications (with the poor being enticed to open new accounts despite having one due to the offer of free personal accident insurance and life cover, apart from eligibility for overdrafts), this is quite simply a game-changer. Reason: despite the huge cost of rollout, the subsidy savings that this will enable will probably pay for the costs. Savings could be over Rs 50,000 crore annually on the subsidy bill alone when these payments are routed through bank accounts, including the PMJDY. Banks can then earn more from the floats made possible. Without a bank account, no subsidy reform is possible, for the key to monitoring the flow of money to the right pockets depends on authentication – which the PMJDY manages to do with a mix of Aadhaar-enabled IDs and/or other forms of authentication. The problems with the scheme are obvious and short-term in nature: of the 116 million accounts, nearly 83 million have zero balance. In short, they are accounts with no possibility of a transaction till money flows to them. [caption id=“attachment_2014253” align=“alignleft” width=“380”]  Prime Minister Narendra Modi. AFP[/caption] This means financial inclusion will remain on paper till the percentage of zero balance accounts reduces steadily. Can this happen? Under Modi, it is beginning to happen through the direct cash transfers scheme for government payments, including subsidies. According to statistics now available, LPG subsidy payments – estimated currently in the range of Rs 25,000-30,000 crore annually – are getting routed compulsorily through bank accounts. Some 50 percent of the 16 crore LPG consumers are already linked through bank accounts, and by 1 April 100 percent coverage is expected. The Economic Times says that “the government has already disbursed Rs 6,688.98 crore to 8.03 crore LPG customers up to 14 January and the figure could go up to Rs 25,000-Rs 30,000 crore annually.” Once LPG is done, the next obvious target will be kerosene, where current subsidies could be in a similar range of Rs 25,000-30,000 crore. The other big scheme to use bank accounts will be the Mahatma Gandhi Rural Employment Guarantee Scheme (NREGA), which has an outlay of Rs 33,000 crore annually. Some Rs 15,000 crore already flows through bank accounts. The PMJDY will gradually take the figure closer to 100 percent over the next year or two. According to BusinessLine, funds for three pension schemes (Rs 9,690 crore), 24 scholarship schemes (Rs 5,756 crore) and seven other schemes (Rs 2,583 crore) are also being routed through bank accounts. The bid daddy of subsidy payments will obviously be food and fertiliser subsidies, which this year have outlays of Rs 1,15,000 crore and Rs 72,970 crore respectively. That’s a massive flow of Rs 1,87,970 crore currently going to the Food Corporation of India. Nobody knows how much of the subsidised grain actually goes to the poor. PMJDY will ensure that it does, once food and fertiliser subsidies are also paid through banks instead of physically through shops. Put these numbers together, and what you get is a huge potential flow of government subsidies in the range of nearly Rs 2,90,000 crore. If even a third of this flows through the Jan Dhan accounts, that’s a sizeable volume of nearly Rs 1,00,000 crore. Compare that with the current balance of just Rs 9,218 crore in 116 million PMJDY accounts. Looking at a two- of three-year timeframe, PMJDY – even assuming the huge costs of rollout – will probably pay for itself. Reason: elimination of subsidy leakages of even 20 percent of the total will yield savings of more than Rs 58,000 crore. PMJDY is well worth it.