Friday, January 6, 2017

Way to Cashlite Economy

Market and State are principal agent of development. The welfare prone Indian state is now promoting the digital financial inclusion and cashlite economy.The demonetization narrative and data has been diverted towards digital and cashlite economy. The state appears to have vision of going cashless, notably like South Korea, Denmark, Sweden, and Norway. The cashless economy is an utopia but cashlite economy will happen till 2050. The digital ecosystem in India is demonstrated in the diagram below (Thanks Microsave) :



The issues in move towards cash-lite economy has been discussed in detail here -:

1. Policy Level: RBI has drafted policies (in its Payment System Draft Vision Document) to accelerate the shift towards electronic transactions. This policy will require an integration with National e Governance and Digital India plan for having a significant outreach and affect. The 'Committee on Digital Payments', headed by Ratan P Watal deployed by Ministry of Finance has already delivered report on digital payments. They have suggested fiscal incentives to promote digital transactions and a separate regulator to deal with issues concerning payment. Payments and Settlement Act, 2007 will need revision under fast changing digital ecosystem. Unified Payment Interface (UPI) acting as gamechanger has enabled all bank account holders to send and receive money from their smartphones without the need to enter bank account information or net banking userid/ password. RuPay has gained more than 1/3rd market share in total cards outstanding and 18% share in terms of volume of debit card transactions. RuPay is pioneering step as it has lower integration fee with banks and reduce the outflow of precious forex. There is need for incentivizing and strategizing the consumers to use digital accounts. Digidhan is an initiative for promotion of digital payments with lucky draws for consumer and business entity. Beneficiary of government user will receive DBT, scholarship, pension, social transfers and price subsidies from the state as well as central government.

2. Internet Connectivity: The first question to be asked by marketers on digital India: Is the quality of Internet connectivity good enough to go for consumption online? Current internet penetration in India is 34.8 % of the total population. (source). Connectivity issues and the power scenario in the country often impact transactions in India. The Cost, Speed and Reach are three major factors influencing spread to tier 2 and 3 cities in India. The introduction of 4G in the Indian markets is expected to be the next game changer but the prices of broadband connections as well as data charges for 3G/4G are quite high. Unless 3G/4G comes at par with 2G rates, one can't expect digital initiatives like these scaling up. Also, the failure of digital transactions is highest with 2G connectivity. With improvements in connectivity and reduction in cost, the market is set to explode with innovation.

3. Role of Banks: 24*7 and 365 days banking will come through the change in financial services in India. Promotion of (e-KYC) information previously captured during enrolment for Aadhaar, and available electronically to banks or enrolling institutions will reduce a lot of paperwork and time for the banks. A waiver on debit card fees having no credit risk must be promoted among customers. Instead of Surcharge fees and Convenience fees, promotional discount and incentive on current account with some interests will promote people to move towards digital footprint. The presence of multiple players and increase in e-commerce volumes has helped rationalize payment gateway charges to 2.5-3.0% that used to hover around 4-7%.  Saral Mukherjee on Livemint has correctly argued : Benchmark for the merchant discount rate (MDR) for debit cards should be the NEFT/RTGS/IMPS fees rather than credit card fees. If the IMPS charge for transferring up to Rs1 lakh is Rs5, why should debit card use cost 1% of transaction value? Card-based transactions also leave an audit trail. Since MDR on debit cards is a cap and not a floor, banks could have proactively reduced MDR to spur adoption.

4.  Role of Market: The old existing business models for the merchants must be molded such that digital transaction will reduce their time and cost of conducting business. The move to cashless transaction can originate from the retail consumer but needs to involve wholesalers, distributors and manufacturers in the supply chain. E-commerce firms are doing 70% of business through cash on delivery in India. Cash transaction increases another level of risk to the supply chain in the form of cash handling and higher rates of return of products. There is need to have push for digital payment infrastructure. With easier availability of capital through online lending will be a catalyst for MFIs to digital payments, both as a way to repay the loan, and accept consumer money. The future of rural banking and microfinance is sachet sized cashless transactions! This will reduce costs, minimize ticket sizes and volumes will go up!

5. Last Mile Connectivity:The network of Banking Correspondent agents will be utilized in the cash-lite economy. Agents are working on low profitability due to the low levels of transactions and high operational expenditure. Agent dormancy, or inability to deliver service, has a corrosive effect on trust, which is the bedrock for any system of digital financial services. Any initiative in digital services must pay attention to the business size and frequency that will come through use of micro ATMs, mobile money and mPOS terminals. There is a report by microsave on long road ahead for digital economy for all. The agent must be well prepared to handle behavioural traits like habit of using cash with compelling value proposition, offers and anti-fraud procedures in explaining the digital services to the rural customer.

6. Consumer Protection: More secured online payment systems is the primary concern of the consumer. The failure rates of transfer/payment, grievance settlement, fraud management, integration support and lead time are the evolving areas required for consumer protection in digital economy. Ease of use, honest pricing, individual data protection and cyber security are all required for customized end product and fintech providers will have chance for innovative solution. The financial service providers must be transparent in process of customer recourse, complaint management and dispute resolution.

7. Digital Financial literacy: Digital financial literacy program needs push from government in creating awareness and customer protection. The conception of financial literacy is packed with stereotypes of the poor as ignorant and in need of moral lessons on savings, consumption and credit. The attention must be paid for entertainment and engagement rather than learning module in design of mobile app, advertising and training material. There is need of persona or mascot for digital product that can target the early adopters.

8. Convergence: A digital ecosystem will prosper with the amalgamating schemes and campaigns. According to the EY reportpenetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS.There is 12.5% excise duty and 4% special excise duty on swipe machine imported from two manufacturers--Ingenico and Verifone. Manufacturing of Swipe machine must be linked with Make in India campaign. This can be done by promoting India an electronics manufacturing hub. This is what economist Atul Kohli called state-directed development, not simply private sector expansion. There is need for integration with Smart City for piloting schemes such as online payments for home utilities (electricity, water, gas and taxes) and municipal taxes.

9. Role of Development Sector- The development sector is least prepared for the change with digital India. They need to tap into informal sector through pilot scheme and CSR activities. Example, a pilot can be done by altering the flow of wage accounts in the informal sector from cash to digital through community mobilization and focusing on migrant workers. NGO as partner can increase outreach and capacity building of SHGs can be better done through their medium.

According to a 2014 study by Tufts University, The Cost Of Cash In India, cash operations cost the Reserve Bank of India (RBI) and commercial banks about Rs 21,000 crore annually. This shows India as cash intensive, even for a developing country. Internet usage and penetrations, smartphone penetration, e-commerce growth, GST implementation, new banking licenses, tax reforms and the evolving cashless payments landscape will take India towards cash-lite economy. Given the evolutionary stage of the digital market, both old and new business will be bound to make mistakes and business models are likely to evolve. The future lies in identifying business models and incentives for transitioning merchants and consumers to go digital.

Friday, December 30, 2016

Universal Basic Income

Universal Basic Income is an idea whose time has come. Universal basic income will be a form of social security in which all Indian citizens below the poverty line regularly receive an unconditional sum of money from the government. The amount may be as little as Rs2000 - Rs3000 a year, but that's a lot of free money in the bottom rungs of the income pyramid. Poor families are always destabilized due to their lives irregular cash flows and looming expenses. This will act as small cushion for critical times.

Why the time is ripe politically ? Demonetization has also created a disaster effect on Indian economy and market. Hence, NDA government has changed the demonetization narrative from one of fighting black money to bring about pushing for a cashless economy. NDA had prominently highlighted the issue of black money and had promised to bring it back in Lok Sabha election campaign. Universal Basic Income into Jan Dhan Account will be seen as commitment to a political agenda and a smart way to fight poverty.

There are two major school of thoughts under Direct Cash Transfer (DCT) - CCT and UCT. A comprehensive review of the evidence around cash transfers, Berk Ozler of the World Bank suggests that an unconditional cash transfer (UCT) can provide a critical foundation, on which policymakers can layer carefully designed, targeted CCTs to encourage specific outcomes, such as education or health behaviors. Unconditional Cash Transfer (UCTs) consist of cash grants with means testing to ensure funds go to the intended recipients, but without extra requirements on recipient behavior. Universal Basic Income comes into category of Unconditional Cash Transfer. Those who are further interested in the subject, this video does an excellent job:


While the number of Jan Dhan bank accounts opened as per the latest estimates stands at 26.03 Crore, reaching the last-mile user remains a problem and large number of dormant accounts. Only 14.43 crores of them are aadhar seed hence a verification and duplication is tough to avoid. But universal basic income will help banks to reduce current number (23.85%) of zero balance accounts. A 2013 CGAP report actually points that electronic Payments and social cash transfers in India can improve the business case for banks and agents.

Concept of universal basic income is utilized in developed countries currently. The available routine, process-oriented jobs job of people may be automated in a few years’ time due to the digital revolution, artificial intelligence and robotics. Finland has begin paying basic income to unemployed citizens. A recent research paper suggest that even done for short–term unconditional cash transfers (UCT) will create longer-term impacts.

Cash transfers are an effective, low-cost social protection tool, but they don’t on their own move people out of poverty. The cash transfers should not be seen as a substitute for state actions. There is always investment required in improving infrastructure for health services, education, skill training, and other social programs. The policy question remains still to be answered as universal basic income may sound great but questions remain over whether India can afford it. How much money can be termed as a true “basic” income for household? Should it be truly be both unconditional and universal? Can the program be tailored for more gender sensitive in nature? The debate has just begun and can be read at LivemintGlobal dialogue. More time will be needed for individuals to understand how universal basic income will affect institutions, and their relevancy to their daily lives.

Friday, December 23, 2016

World Bank Report on Behavioral Economics

Humans in the real world behave in ways that are strikingly inconsistent with rational models based in economics. Bounded rationality, bounded self-interest and bounded self-control in human is a pure fiction, not a reality. With these assumptions, the profession of economics with its obsession with mathematical modelling has, over time, hopelessly removed from the complexities on the ground. Global Recession of 2008 was a jolt to the the neoclassical free market purists who were unable to predict market failure. The shock led to to the mainstreaming of behavioral economics. Behavioral economics is a subfield of economics that draws on the psychological, social, and cultural foundations of human decision making.

A Mckinsey report: Redefining Capitalism has summarized this quite good -  Over the past several decades, though, some of the bedrock assumptions of neoclassical theory have begun to unravel. Behavioral economists have accumulated a mountain of evidence showing that real humans don’t behave as a rational homo economicus would. Experimental economists have raised awkward questions about the very existence of utility; and that is problematic because it has long been the device economists use to show that markets maximize social welfare. Empirical economists have identified anomalies suggesting that financial markets aren’t always efficient. And the macroeconomic models built on neoclassical ideas performed very poorly during the financial crisis.

I have previously written on World Bank reports too in a grim sense. But this is different and big. Mind, Society, and Behaviour is a World Bank report of 2015 that will lead to major redesign in the field of Development Economics and Development Policy. The resource material is good for a detailed study and can be utilized as an example for a beginner as well as expert. As per Kaushik Basu, Senior Vice President and Chief Economist of the World Bank :"This Report distills new and growing scientific evidence on this broader understanding of human behavior so that it can be used to promote development. Standard economic policies are effective only after the right cognitive propensities and social norms are in place." (Source)

The report considers the importance of irrational and often unpredictable behavior in human decision making. It is based on theoretical and investigative work that comes with uncovering the underlying rhythms and rules of human behavior. The report stresses that focusing more closely on correctly defining and diagnosing problems with human element can lead to better designed interventions. The report applies the three principles to multiple areas, including early childhood development, productivity, household finance, health and health care, and climate change.

I will quote a passage of the report (page 22) for the glimpse: From the hundreds of empirical papers on human decision making that form the basis of this Report, three principles stand out as providing the direction for new approaches to understanding behavior and designing and implementing development policy. First, people make most judgments and most choices automatically, not deliberatively: we call this “thinking automatically.” Second, how people act and think often depends on what others around them do and think: we call this “thinking socially.” Third, individuals in a given society share a common perspective on making sense of the world around them and understanding themselves: we call this “thinking with mental models.”

Solving last mile challenges and Behavioural Change and The Making of Homo Honoratus: From Omission to Commission are examples of how behavioural quirks lead to success in the public policy. Economics without debates, politics or history is a dead mathematical exercise devoid of any intellectual and humane base. The past is already gilded with Locke, Bentham, Mill and Rawls. In the current age of techno-utopianism, the new star in town is Professor Daniel Kanheman. The transformation of Homo economicus to Homo sapiens has began.

Monday, December 19, 2016

Riddle of SHG Movement

Why SHG movement failed in *North-East India but successful in Kerala ? Kerala and North East are both quite high in literacy rate and women dominated society.  Even recently Tripura has become the most literate state in the country overtaking Kerala. This question was asked by a government officer in Ganjam district where I was deputed in my stint at Odisha Livelihood Mission.  The argument seems valid but I had three reasons for the failure now.

1. These are matrilineal societies, not matriarchal ones. Matriarchy is not just about descent and inheritance being traced through the female line. The matriarchal system means a system where women have power in “all activities relating to allocation, exchange and production, as well as socio-cultural and political power." When descent and inheritance are traced through women it’s called a matrilineal system. Matrilineality is only a sub-system of matriarchy and the power in the social power structure remain in the hands of male only. Traditionally, it was communities like the Nairs, Ezhavas and Warriers in Kerala & it’s the the Khasi, Jaintias and Garo tribes (majority of the population of Meghalaya) who practice or used to practice this system. For more about women in North East, please read Status of Women: North Eastern Region of India versus India by Dr Ira Das

2. Population Density is the biggest difference between them. Kerala is home to 2.76% of India's population; with a density of 859 persons per square km, its land is nearly three times as densely settled as the Indian national average of 370 persons per square km. [Reference] This is the major reason as sparse population in the hilly region create a high operational cost and challenges in the last mile connectivity in North-east India.

3. Lack of penetration of financial services is the major reason behind failure of SHG drive. There are only 2.3 per cent of total account in Northeast India.while the maximum no of 27.44 per cent of total account in South India. Read more Financial Inclusion in India:A Brief Focus on Northeast India. Stronger presence of MFIs in the Assam and Tripura helped reduce the disparity but there is a long way to go.


4. In a region ravaged by conflict, business as usual is no longer an option. The political risk due to constant terrorist and insurgent activities with AFSPA have also led as a major hindrance for investment in infrastructure. There has been chaotic process of creating a peaceful state, an economy and a workable political settlement from the violent, corrupt, and poverty-ridden area shows the development process in all of its historical reality.

The picture with inclusion in the development emerges is of increasingly nuanced collaborations and partnerships: business-state, business-society, and between formal and informal business. The promise of financial inclusion in India has been for long time but has never materialised.The Reserve Bank of India is navigating the path to financial inclusion by means of regulations and guidance. RGVN (North East) Microfinance Limited, the only micro-finance company from the region to be selected by the RBI to set up a small bank. The development of financial services will also be a source of growth in North East in the future.

*The Northeast India comprises of contiguous eight states of Arunachal Pradesh, Assam, Nagaland, Manipur, Meghalaya, Mizoram, Tripura and Sikkim - is geographically, ethnically and culturally different from the rest of the country.

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This Blog is meant purely as a personal diary of a rural manager in making. It exists to record information, experiences and opinions about various issues encountered in the line of duty. Any person, institution and organization mentioned here doesn't assume any liability for its contents. This is not a deliberate attempt to defame anyone. And if you have actually read all that is written in the blog and aren't mad at me, then thanks for your time and patience !
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