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Smart card, a tool to empower the poor

T. C. A. Srinivasa-Raghavan
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Dr Arvind Virmani, former chief economic advisor & executive director, IMF.
Business Line Dr Arvind Virmani, former chief economic advisor & executive director, IMF.

Given a positive regulatory environment, banks and other financial intermediaries will certainly be interested in using the smart card opportunity.

 Dr Arvind Virmani, with a Ph.D. from Harvard and 30 years of professional experience, is one of the most valued economists in the Government. Before he retired as Chief Economic Advisor in 2009, he had served in the Finance Ministry and the Planning Commission. A researcher par excellence, his research papers have often been used by the Government as key inputs for policy. Dr Virmani was also associated with the liberalisation of the foreign exchange regime in India. He is currently an Affiliate Professor (& Distinguished Senior Fellow), George Mason University (School of Public Policy-CEMP), and Executive Director, IMF.

For an Integrated Smart Card to work, how long would it take to digitise existing records?

The proposed multi-application smart card (MASC) was designed to take account of divergent interests and efficiency of different departments. 

It consisted of a core module consisting of the UID and related data that would be relatively permanent and a number of modules that would be assigned to different departments such as Food - PDS, Petroleum (LPG, Kerosene), Fertiliser, Education etc that were currently giving subsidies in one form or another as well as a new module for cash transfers. 

The idea was that each department could decide the exact methodology for giving the subsidy as well as the time-frame over which it wants to switch over to the use of MASC. 

However the UID is the foundation of the MASC and the applications can only start once the UID has been issued as per the schedule of the UID Authority.  Whichever department takes pre-emptive action could probably start the first application within a year of this happening.

What impact could an Integrated Smart Card with the ability to carry out financial transactions have on banks and their existing system of debit cards? 

The 12th Plan Working group on MASC and the ‘Process Committee' appointed to start the implementation (both of which I chaired), focused on the government subsidies and transfers, so as to resolve inter-ministerial disagreements and reach a consensus.  

We were however, fully aware of the requirements of banks and financial institutions and indicated that a system by which they could use the identity information on the Smart card to help spread banking to non-banked individuals could be explored as this would also help in defraying the cost of the system. 

We did not recommend to include a bank credit/debit card module into the MASC as this would raise unnecessary complications which of one or more credit card companies should be given a module.  I would still recommend this course of action, at least till the MASC has become firmly accepted by the government departments and the public!

Will banks be willing to support the smart card initiative? Are you sure?

In my view inclusive banking will be given a fillip if banks can access the UID data base to verify identity of a person and this can be combined with mobile phone banking and micro payment systems. Such micro payment systems (Mpesa) and mobile banking systems are functioning efficiently and effectively in many African countries and I see no reason why the Reserve Bank of India and other regulators cannot tweak the rules to provide a fertile environment for such payment systems.  Given a positive regulatory environment, banks and other financial intermediaries will certainly be interested in using the opportunity.

What could be the quantum of investment required for digitisation of existing records and setting up the IT infrastructure required ?

I do not have a precise estimate, but the order of magnitude must be similar to that of setting up a credit card system.  As far as digitisation is concerned, it will vary from department to department. For instance, oil marketing companies already have records of LPG users and the cost of digitisation would be minimal.  Similarly, a co-operative fertiliser company once offered to digitise and implement a smart card- based nutrition-linked fertiliser subsidy at its own cost!  So whatever the cost, there are many efficient and honest companies that would be willing to share the cost of introducing a clean, effective and efficient system of subsidies and transfers.

What would be the complications of having multiple modules of data on one smart card, if any?

The advantage of multiple modules is the possibility of finding out whether every deserving person is getting some subsidy and how many are benefiting from multiple subsidies, besides the usual benefits of making it easier to reduce leakages.  Obviously each individual would have to take as much care in safeguarding his/her MASC as he currently does with respect to his purse, car or other valuables.

Will there be a separate authority needed to oversee the functioning of smart cards, such as the UIDAI for Unique IDs? 

As indicated earlier , each department would be responsible for its module. What need to be integrated are the data bases of the different departments, so as to allow cross-checking and determination of total subsidies obtained by each individual.  The question of integrating subsidies and/or reducing the number of modules should be left to a future date! 

Appropriate safety and security features must be built into the smart card, which can periodically be checked to ensure that illiterate/poor/powerless people are not defrauded of MASC.  But compared to the current problem of being defrauded of their ration cards or other entitlements, the digital data bases will allow creation of software-based fraud detection systems of the type that exist for detecting credit card fraud.

For the user, what would be the biggest benefits of such an integrated smart card? 

The MASC, if properly designed and implemented, is a tool for empowering the poor.  It will help transfer the power of government subsidies and transfers from the bureaucrats who run the system to the intended beneficiaries of these subsidies. It can help ensure that enormous increase in pro-poor programmes since Ms Indira Gandhi initiated the Garibi Hatao movement in the 1960s actually reach the poor and help eliminate poverty instead of resulting in replacing each failed programme with another programme that fails and is replaced by yet another one!  

What would be the biggest challenge in the implementation of the smart card programme?

As with any revolutionary change, the media, NGOs and the interested public has to be extremely vigilant to ensure that those who benefit from the corruption and leakages in the current system do not sabotage the change!  Given a positive regulatory environment, banks and other financial intermediaries will certainly be interested in using the opportunity.

(This article was published on March 29, 2011)
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