Research & Analysis

From Cash to Digital Transfers in India: The Story So Far

India has ambitious goals to deliver electronic welfare payments, banking services, and digital local government services to each of its 638,000 villages. The road is fraught with challenges as about 60 percent of the country’s 1.2 billion live in rural areas and many lack connectivity and infrastructure. Moreover, at the policy level, digitizing India’s annual $72 billion subsidy machine is a massive task organized across ministries, departments, and 29 state governments. Since 2006, a few state governments have been experimenting with electronic cash transfers via bank accounts, delivered through bank agents. By 2013, the federal government had selected some of the largest cash transfers to shift to an electronic system, and the process is gaining momentum this year with a renewed effort by the newly elected national government.

This Brief addresses the key elements of digitizing cash transfers, which can also enable financial inclusion in a way that it leads to account use, not just account opening. CGAP conducted research on the state of Andhra Pradesh in 2013—one of India’s first state governments to move to an electronic payment disbursement system. The research blended quantitative and qualitative methods to understand the customer, provider, and government perspectives to find out why the 16 million government-to-person (G2P) accounts are not being used except for the one transaction per month to disburse the G2P payment. The study found several barriers: lack of awareness among recipients; closed-looped technology solutions that do not enable customers to use the account at any other time, for any other purpose other than to receive a benefit from a particular agent; high costs; and lack of incentives for banks to deliver financial products.

Armed with the insights gleaned from this research, CGAP then worked with three states in India to apply some of the lessons. The following draws on our research and discusses practical design solutions that were tested in these three states.

Global literature on G2P suggests that although digitizing government flows has led to more efficient systems, there is no clear direct positive impact on financial inclusion. One reason for this lack of clarity is that policy experts who are designing electronic G2P payment channels are often working separately from those who are designing financial inclusion policies.

Another reason involves sequencing. If the digital “plumbing” is already in place—such as a branchless banking network, a system of agents, or a robust authentication system—then the government can leverage that network for disbursing payments. Pakistan is illustrative of this; EasyPaisa, a mobile financial service, uses its existing agents, to disburse funds of the government’s cash subsidy scheme (Benazir Income Support Program) to some of the poorest women in the country. EasyPaisa leveraged an agent network that had been built up for its primary purpose, which was banking services.