The economics of Aadhaar
When it was first launched in 2009, Aadhaar signalled a promise to repair the corroded plumbing of India’s leaky public delivery systems. The unique biometric identity would help reduce duplicate and ghost entries in the list of beneficiaries of government schemes, and pave the way for direct benefit transfers to them eventually, the then government headed by the Congress party told us. The elimination of false claimants and a chain of government officials who administer public delivery systems would help cut down on corruption and enable the state to do more with fewer resources, we were told.
Eight years after its launch, and more than a billion Aadhaar registrations later, much of that promise remains unmet even as the project remains mired in a number of controversies. The Aadhaar project has survived a change in government but has met with a rising tide of questions from the Supreme Court, the national auditor, and from the civil society at large.
Why has the dream turned sour? A survey of the existing research on the subject suggests four key reasons. First, the Aadhaar project seems to have been launched and executed without adequate legal safeguards on the storage, usage, and distribution of data of citizens, and with limited scope for redresses. The risks of abuse have been constantly understated by policymakers. The ambiguous stance of the Unique Identification Authority of India (UIDAI), which runs Aadhaar, and the government as a whole, on privacy concerns, has not helped inspire confidence in the project.
Second, there does not seem to have been a rigorous attempt to perform an independent cost-benefit analysis either before or after the launch of the project. The results of pilot projects—which suggested several challenges—did not seem to have any impact, and there was little attempt to even fix criteria for evaluating the project. Various claims about public savings from linking Aadhaar to various beneficiary databases have emerged but as we shall see, they rest on weak evidence.
Third, the sequencing of steps required to implement an Aadhaar-based payment and direct benefit transfer (DBT) architecture did not receive the attention it deserved, leading to debilitating challenges as the project gets universalized. The issue of implementing cash transfers in a country such as India is a separate and complex issue in itself, and one that an earlier instalment of Economics Express dealt with.
Finally, the mindless expansion of Aadhaar linkage to schemes or areas where there is limited scope for leakages at a time when several problems have emerged regarding such linkages have only served to weaken the original premise of Aadhaar: That of being an effective instrument in targeting leakages. Had the linkage been restricted to a few key programmes, and the evidence regarding such linkages carefully examined and analysed, the response to the Aadhaar project would have been quite different from what it is now.
Let’s start with the evidence so far on the savings from the Aadhaar linkage. The Aadhaar-linked DBT scheme for liquefied petroleum gas (LPG) subsidy or direct benefit transfer for LPG (DBTL) has been the success story cited most often by government officials and lawyers representing the government in courts. The Economic Survey 2015-16 claims that DBTL led to a reduction of LPG subsidy by close to 25%. Different policymakers at different venues have claimed that the linkage led to savings worth Rs15,000 crore for the government.
On close scrutiny, such claims appear to be misleading. First, such claims do not take into account the decline in subsidy outgo because of the sheer drop in global oil prices. According to one estimate by the Comptroller and Auditor General (CAG) of India, the fall in oil prices account for 92% of the “savings” attributed to the DBTL scheme. Secondly, we do not know if such estimates account for exclusion errors at all (genuine beneficiaries being knocked off the LPG list).
The more empirically grounded study in favour of the DBTL programme comes from a study by Michigan State University economist Prabhat Barnwal.
Using a rich transaction-level data set on LPG purchase, Barnwal shows that the introduction of the DBTL policy led to a decline in domestic fuel purchases ranging between 10% and 13%. But even this estimate remains silent on the issue of non-compliant or excluded households. And, this problem plagues almost all estimates of savings claimed by the government: We simply do not know how much of such “savings” are at the cost of genuine beneficiaries rather than ghost or duplicate accounts. Ground reports from different parts of the country seem to suggest significant exclusion errors of genuine beneficiaries in Aadhaar-linked schemes.
One recent field study published in the Economic and Political Weekly investigated the implications of linking the public distribution system (PDS) for foodgrains in Hyderabad with Aadhaar.
Based on an interview of 80 households, the study found that 66% of these households reported issues with the technology including fingerprint authentication errors, Aadhaar seeding issues, and poor connectivity.
The Economic Survey 2016-17, which is otherwise very gung-ho about the Aadhaar project, noted the high rates of authentication failures in several states. According to a more recent report on the state of Aadhaar by Ronald Abraham and co-authors published recently by IDinsight, an international development consulting organization, between April 2015 and March 2017, the pension programme in Andhra Pradesh reported fingerprint authentication failure for 17.4% individuals, despite three attempts. Similarly, the failure rate averaged 7.8% for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in Telangana. These estimates indicate the upper bound of authentication failures rather than actual failures because some of these “failures” might be because of people trying to fraudulently access benefits (which is what the authentication is supposed to prevent). Nonetheless, these estimates suggest that genuine exclusion errors may be far higher than what was originally anticipated. In 2011-12, when the UIDAI tested authentication processes, it expected only 1% of beneficiaries to face such difficulties, the report notes.
The challenges faced by beneficiaries in Andhra Pradesh and Telangana are a bit surprising because Andhra Pradesh (undivided) has a long history of leveraging technology and smart cards for identifying beneficiaries and delivering payments to them. In fact, one of the oft-cited studies in favour of Aadhaar is based on evidence from the introduction of smart cards in MGNREGS in the state.
The introduction of the smart card was done in a phased manner and so the researchers were able to measure the relative impact of the introduction of the smart cards. Economists Karthik Muralidharan and Paul Neihaus of the University of California, San Diego and Sandip Sukhtankar of Dartmouth College found that the new system “delivered a faster, more predictable, and less corrupt NREGS payments process without adversely affecting program access”.
The researchers estimated that the new technology brought down leakages in MGNREGS by 12.7 percentage points. The value of beneficiary time savings alone exceeded the cost of the intervention, the study said.
Despite this experience, Aadhaar linkage does not seem to have been as successful in the state. One big reason for the difference could be connectivity issues. Unlike the smart card initiative, which relied on offline authentication, the Aadhaar-based authentication system requires access to a central server for authentication.
Another big challenge is biometric mismatches of genuine beneficiaries when their fingerprints no longer match with what is recorded on the central database. The hands of the daily wage earner are too chafed and the biometric doesn’t work; they are asked to apply vaseline and wait for days before they can avail benefits, journalist Anumeha Yadav wrote. Yadav pointed out that neither the point-of-sale personnel nor banks nor the district administration were adequately prepared for the rollout of Aadhaar in Jharkhand. Similar problems were recorded in pilot projects elsewhere.
The lack of attention to proper sequencing has meant that neither the gaps in the country’s digital infrastructure nor those in payments systems were addressed before the Aadhaar-linked DBT initiative was scaled up.
One reason for such unplanned expansions is the absence of any parameter or base-line surveys for gauging the impact of Aadhaar-based DBT, in sharp contrast to the Andhra Pradesh smart card initiative. When a journalist asked the then Union minister and a key proponent of this initiative, Jairam Ramesh, about the performance parameters for judging Aadhaar-based DBT, he was told that answers to such questions “...can only be provided as we go along” .
There was one attempt at a cost-benefit analysis of the Aadhaar project by a research group at the National Institute of Public Finance and Policy (NIPFP), funded in part by the UIDAI itself. The study estimated that utilizing Aadhaar for schemes such as PDS and MGNREGS could help the government save at least a tenth of the amount spent on these schemes. But a rebuttal by development economist Reetika Khera pointed out that the estimates are based on old data on leakages, and over-stated assumptions about “ghost beneficiaries”.
The Parliament once asked for a full-fledged analysis of the Aadhaar project. Sadly, there is very little data that the government has shared in this regard, and hence there is little information on the economic returns from the project.
The lack of evidence-based policymaking has meant that the project has run ahead without adequate course corrections, and those pointing out flaws or challenges have either been ignored, or silenced. One critic of the project found himself facing a first information report (FIR) filed by the UIDAI.
Most policymakers have tended to underplay the concerns about data fraud and data breaches. But the human and financial implications of such breaches in the digital age are not trivial. Often comparisons are made with the social security number (SSN) system in the US but the SSN contains far less information, and is linked (or can be linked) to far fewer databases than is the case with Aadhaar. Yet, identity theft involving SSN numbers costs billions of dollars annually in the US, and these costs have been rising over time, as the digital transformation sweeping the world has made it easy to link different sets of data and the personal information of victims. The dangers of abuse by the state surveillance machinery, or by rogue officials, are also very real in the case of Aadhaar.
Ideally, these issues should have been debated threadbare and addressed on the floor of Parliament before the launch of the UIDAI project, or at least before the passage of the Aadhaar Act. But the flip-flops of the major political parties on the Aadhaar project means that not enough attention was paid to issues relating to data sharing or privacy, some of which are now being taken up by the courts.
The lack of attention to details while scripting the Aadhaar law has also meant that there is very limited scope for redresses, as economist Renuka Sane and lawyer Vrinda Grover pointed out in a Mint article.
“As Aadhaar becomes the core around which our relationship with the state revolves, we need to ask ourselves if the surrounding legal framework provides enough clarity on the enrolment, authentication, and storage processes,” the duo wrote. “Are there adequate protections against misuse? Do citizens have access to an adequate grievance redressal mechanism? We think the answers to these questions are a resounding no.”
Sumit Mishra teaches economics at the Institute for Financial Management and Research, Sri City.
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