E-Payments Could Save India $23 Billion a Year.........

India could save enough money every year to cut its fiscal deficit by 20%, lift the income of those living in poverty by a fifth, boost welfare spending by 25% or feed every hungry person in the country without selling a single share in MTNL, BSNL, Air India or any other state-run company, according to a report released Monday by McKinsey & Co.



All the country needs to do to save one trillion rupees, or about $23 billion, per year is stop paying people with cash and checks and start paying them electronically.


In a report entitled “Inclusive Growth and Financial Security: The Benefits of E-payments to Indian Society,” the consulting company outlines how a new e-payments system could theoretically pay for itself within its first year of operation. A national network of computers in government offices, broad-band connections and transaction points in every village would only cost around 700 billion rupees, or $16 billion, to build, the report says.


“Delivering government payments electronically to the poor will not only pay for itself but will also connect households to a formal and secure financial grid,” the report’s authors say. “The basic infrastructure and connectivity this provides will also create an attractive business proposition to encourage private players to enter this space and provide services to the poor”.


The Indian government has failed miserably at bringing its hundreds of millions of poor citizens into the formal, modern financial world. Only around 40% of Indians have access to bank accounts, 10% have access to life insurance and only 1% have access to non-life insurance.


The failure of the government and mainstream banks to provide basic financial services to the poor is one of the biggest reasons the microfinance industry, which hands out tiny loans to village entrepreneurs, has flourished in India (although it is facing a backlash now, at least in one part of India).


While much of those billions in savings are from all the time and effort (and signatures and stamps) required to move cash and checks around, the lions share of the savings would be from reducing what McKinsey has euphemistically labeled “leakage.” A better word to describe the billions a year that “leaks” out of the hole-riddled physical delivery system is theft, usually by government officials or at least with their collusion.


McKinsey estimates that around $18 billion a year is stolen from the government through over-invoicing, false recipients and other means. Those holes in the system could be plugged by e-payments, the report claims.


Mckinsey’s is the latest in a long line of grand plans that suggest the right technology could solve India’s problems. It fails to address what to do about the country’s power leakage problem which leaves much of India without power for most of the day and would make e-payments difficult.


It also fails to suggest how you would get the new network approved and built, when the people in charge of doing that are probably the ones who benefit most from the old, leaky system.