Fiscal stress and revenue generation from Aadhaar
The Union budget for 2018-19 was that of a fiscally stretched government. Stretched because of all the ambitious ideas for using revenue not yet in hand. And now, a few weeks after the budget, even more stretched by the avalanche of public sector bank (PSB) scams that will eventually have to be met through the exchequer one way or another.
The fall in non-tax revenue was among the reasons advanced for the fiscal and revenue deficits being higher than budgeted in the year just ending. The Reserve Bank of India (RBI) dividend did fall below expectations. Then there was the shortfall in expected receipts from telecom auctions.
Non-tax revenue is what you get from returns on publicly owned assets like royalties on minerals or dividends from public sector units (PSUs). PSBs are still nursing their wounds, and finding newer wounds by the day. After the recent and most welcome tightening of norms for dealing with non-performing loans announced on 12 February, their profits will be swallowed up ever more by internal provisioning. No dividends forthcoming there. Non-tax revenue can also come from leasing out rights of use to others for a fee.
This is what Nandan Nilekani recommends that the government do with the digital infrastructure created by Aadhaar in a recent article (“Open Up Aadhar Infrastructure”, Hindustan Times, 13 February). Nilekani is a widely revered man for his technical and organizational capabilities, his leadership skills in having resolved the recent impasse at Infosys, his philanthropy, and the awards he gets for being all of the above. And the suggestion he offered to the goods and services (GST) council at its January meeting for de-synchronizing voucher uploading and return filing was good, but apparently poses too big a burden for the GST network to handle.
What scares me is that his opinions on how to generate revenue from Aadhaar might actually be acted upon by a fiscally stretched government. Nilekani begins with self-deprecation, as “someone who had a part to play in the creation of Aadhaar”. Thus, he sets the stage for why his ideas about the use of the Aadhaar information base should be heeded. Let us call it the Aadhaar revenue (AR) proposal.
First, he cites the growth in the last year alone of the mutual funds asset base of small towns by 46% to Rs4.1 trillion. He attributes this to the fact that people can now invest in systematic investment plans (SIPs) with amounts as low as Rs100 instead of storing their money under their mattresses, thanks to Aadhaar-enabled eKYC (know your customer) as compared to the earlier costs of physical verification. Where he is wrong is that the alternative to an SIP was not storage under a mattress. Even people with a mattress thick enough to store things inside or under, do not normally leave savings as inactive cash. There is a time value of money and they know it. They entrust it to an aggregator who then loans it out. The saving is available for local investment.
An entrepreneur who wants to set up a shop for repair of water pumps and other small gadgets like the pressure cookers or induction stoves increasingly used in small towns, can then borrow the financial capital he needs from the aggregator (at exorbitant rates it is true), and he is in business. Even a pakoda maker needs capital. With local savings having been sucked up into mutual funds, the potential entrepreneur can only become a job-seeker, but the mutual funds industry won’t invest in the kind of enterprise that will give him a job in his small town. Using Nilekani’s own figures, if the growth rate of mutual funds in small towns in the absence of eKYC had been say 10%, the incremental siphoning of local savings away from availability for local lending is of the order of Rs1 trillion.
Yes, it is true that mutual funds are now able to give the local aggregator a run for his money, possibly making him lower the margin between his lending and borrowing rates. But no, he is also afraid after demonetization that he will be reported for having black money. So, the rise in his risk premium on that account may leave his margin the same as before, perhaps even higher. Nilekani’s conclusion that “Aadhaar increases reach and inclusion where markets have traditionally failed” is therefore erroneous. On the contrary, Aadhaar has reduced reach and inclusion, where loanable funds were traditionally obtained, albeit through cruel and exploitative intermediaries. Unless it is established that Aadhaar enhances the flow of credit to local entrepreneurs, its effective impact so far has been to add to the number of job seekers.
The second reason advanced for the AR scheme is that denying private players access is akin to saying that because the state builds a highway, only state-owned vehicles should drive on it. How’s that again? The very case for building a highway is that it will be open to public use. Aadhaar was not built up on that case at all. It was justified as a database to be used by the state alone, to improve targeting of social sector expenditures.
Universal access, according to Nilekani (https://goo.gl/KtQDcA), ensures universal oversight over security controls. “The democratic checks and balances that we build to regulate private access will also regulate government actions.” I don’t see such a “democratic” regulator appointed by government, the owner of the data base, subjecting the owner and the buyers to the same scrutiny. The global record of private players in protecting databases is poor anyway. But more later on oversight.
The third reason for the AR scheme is that the big global players are constructing digital identity databases anyway, and storing their data on foreign soil where it is accessible to foreign governments. The proposal contrasts the wealth of that database with Aadhaar, described as a dumb ID. “It only shares your demographic details and a photograph with private players after taking your consent, instead of deep profiles about your likes, browsing patterns and desires”, Nilekani writes in Mint. Aadhaar is not so dumb. If it were, there would be no market for it. To use Nilekani’s phrasing, it does indeed offer a deep profile on a person because it has now been linked to the permanent account number (PAN) and through that to the entire direct tax record of the person, to mobile numbers and therefore to the entire telephone records of the person, to all bank accounts, and all financial instruments, debit and credit cards.
Aadhaar reveals much more than expressed likes or browsing patterns, because it is linked to where the money goes. It tells you what exactly the person bought with any kind of debit or credit card, not what they were browsing through sites looking to buy. It tells you the ratio of cash to digital payments for each individual through their cash-withdrawal patterns from their linked bank accounts. It tells you whom they converse with over the phone and how often, through the linked mobile number. It tracks travel through public modes, and even private vehicles through toll booths.
What a lollipop. I can just see digital identity providers lining up to buy up the Aadhaar database. With that, foreign governments will have even more access to our information than they currently have.
The AR proposal does not actually list the promised fourth reason, but closes with a vision of what would have happened if the US government had huddled to itself the satellite infrastructure which was used to create the geographical positioning system (GPS), used ubiquitously today. Bad analogy again. Isro satellites are the appropriate analogy, built up with public money, and available for use for meteorology and a host of other services. Telecom or road or rail or power or satellite networks were built up with public money, on the premise that these would bring corresponding services to the people, however those services were operated.
Aadhaar was not built up on that premise at all. It commandeered personal information from people, like their fingerprints and iris images, for the exclusive use of government in targeting social sector programmes. Other inducements dangled before us were that itinerant workers would be able to collect their food security or other entitlements even while away from their parent household. That was the contract between the people and the state when Aadhaar was built up. They were not told at the time that private parties would be given access to this information. Bad as the non-tax revenue situation might be, I don’t believe the Aadhaar database should be tapped for its revenue-generating properties.
Back to Nilekani’s premise that private player participation will improve the security of the database. Will it really? The recent string of PSU bank scams tells us that we in India have a serious problem when it comes to supervisory monitoring at the last mile. It just takes a direct approach to someone at the lowest level of the structure to open the floodgates. No private player buying into the database will have a role in security oversight powerful enough to prevent that from happening. And every private player will find it that much easier to reach to levels where manipulation is possible.
Since the global financial crisis, international banks have placed their most competent information technology analysts to work in their compliance departments, for the design of complex mechanical internal checks and balances which will be outside the control of any single individual. We need Nilekani to use some of his undisputed designing skills towards doing that for Aadhaar, so as to leash the juggernaut he helped create.
That still leaves us with having to fill that non-tax hole. Public assets can be leased out for private use in a number of ways that do not damage the public interest. The possibilities are endless. Let us leave the Aadhaar database alone.
Indira Rajaraman is an economist.
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