Ministry approves proposal for UID-linked direct subsidy transfer

Ministry approves proposal for UID-linked direct subsidy transfer

New Delhi: The finance ministry has put its seal of approval on a proposal to directly transfer subsidies to the bank account of a beneficiary that is linked to her Aadhaar, or unique identification (UID) number.

The government has previously articulated its desire to experiment with direct transfers to make its management of subsidies more efficient and ensure benefits actually reach the targeted people.

In a notification issued on Tuesday, the finance ministry extended the scope of a task force it has set up to look at the issue of direct transfers, and which will now have members from the Reserve Bank of India, industry body Indian Banks’ Association, the government’s book-keeper Controller General of Accounts, National Payments Corporation of India and National Informatics Centre, to recommend an action plan for direct transfer of subsidy, where ministries and state governments can transfer funds directly into the bank account of a beneficiary, which will be linked to her Aadhaar number.

Also Read | Aadhaar sets stage for cash transfers

The task force, headed by Nandan Nilekani, chairman, Unique Identification Authority of India (UIDAI), was constituted in February to recommend and implement a solution for direct transfer of subsidies on kerosene, liquefied petroleum gas and fertilizer and was later also extended to the public distribution system through which the government distributes food and fuel to the most needy.

UIDAI hopes to give unique numbers to, and also have a database of biometric information for, 600 million Indians by 2014.

An expert said the notification had formalized Aadhaar’s role in the subsidy delivery process.

“Now the entire infrastructure can run on the Aadhaar-linked payment gateway," said Guru Malladi, partner, infrastructure and government at audit and consulting firm Ernst and Young. He added that now, with UID enrolment gaining momentum, “the focus is shifting on how to put UID to use".

Not everyone agrees to the usefulness of the move.

“Benefits of Aadhaar in the areas of providing identity for the poor and in financial inclusion is clear, but when it comes to subsidy transfers, there could be challenges," said Harsh Mander, a member of the National Advisory Council, which sets the social agenda of the government.

Mander said although Aadhaar is not exclusionary in theory, it can be in the case of the most disadvantaged. “There are other issues of surveillance and privacy involved," he added.

The Tuesday notification also mandates the task force to suggest a framework using the gateway, which can be adopted by all welfare schemes involving disbursements by the government. “The solutions devised by the task force should ensure that the entire country can leverage the same payments platforms."

Apart from making if “official", the notification will “set the stage for (mass adoption of) electronic payments in the country", said a government official involved in the process, who declined to be named.

Currently, various departments and state governments have, or are working, on independent ways to electronically pay welfare or subsidy payments through alliances with bank accounts or through smart cards. Most use different technologies, which are not necessarily interoperable.

“When it comes to disbursing 3 lakh crore of government welfare money effectively and without leakages, there needs to be a standard approach and platform," the official said.

Electronic payments by the government could lead to substantial savings for the national exchequer, according to a report by consultancy firm McKinsey and Co.

“An electronic platform for government payments to and from individual households can save an estimated 100,000 crore a year—almost 10% of the total payment flows between the government and the households," said the October 2010 report titled Inclusive Growth and Financial Security.

It also said that the one-time cost of setting up such a national electronic payment infrastructure would be between 60,000 and 70,000 crore.

UIDAI has so far issued around 33 million Aadhaar numbers and hopes to issue 1 million numbers a day from October. Bank accounts (around 60% of India’s population is unbanked according to RBI data) are critical to direct transfers; at the time of enrolment for an Aadhaar number, people are being given the option of opening a new account or linking an existing account to their Aadhaar number.

UIDAI has empanelled public and private sector banks for the process and the first set of Aadhaar-linked accounts are expected to be opened next month.