Jan Dhan, Demonetisation to empower ordinary Indians

Rising demand at the bottom of the pyramid and more activity coming under the tax net will lead to an increase in demand for a host of consumer goods produced by Indian and foreign companies.

Financial inclusion is, arguably, the first flagship initiative of the Narendra Modi government to meet with success. To the four such schemes that people usually count as being part of the programme - the Pradhan Mantri Jan Dhan Scheme (PMJDS), the Pradhan Mantri Suraksha Bima Yojana (PMSBY), the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and the Atal Pension Yojana (APY) - we can now add another, possibly the most important, one - demonetisation.

Former Prime Minister Rajiv Gandhi had said that only 15 paise of every rupee the government allocated for the poor actually reached the intended beneficiaries. Eighty five per cent of welfare benefits are lost due to leakages, corruption and administrative inefficiencies. Changing this paradigm will create massive opportunities for both Indian and foreign businesses, especially in the medium and small sectors.

$40 billion outgo, huge wastage The government will spend about $40 billion on subsidies in the coming financial year, which is about the same level of outgo as this year. This money is spent on cooking gas, kerosene, fertilisers and food items and also provides scholarships for needy students across the country.

Well-known intellectuals from Harvard and Oxford (universities), who have been at key positions in the Indian economic system, had said the GDP would go down by 2 per cent, some others said it would go down by 4 per cent.-PM Narendra Modi on the impact of demonetisation

Last year's Economic Survey (for 2015-16) said $15 billion or about 40 per cent of the total budgeted subsidy goes to people who don't need it. There was no estimate on how much is lost due to leakages, corruption and administrative sloth.

This is a criminal wastage, especially because unlike in the West, India does not have a universal social security scheme for its citizens. Schemes such as pensions, provident fund and health and accident insurance are available to only a few people employed in the organised sector.

Jan Dhan accounts to the rescue

The Narendra Modi government has succeeded in substantially cutting down leakages by using the Direct BenefitTransfer (DBT) mechanism by which the value of the subsidy is transferred directly to the beneficiary's Jan Dhan account. Just to recap, the Jan Dhan scheme is a financial inclusion scheme launched by the Prime Minister in 2014 to ensure that every Indian family had a bank account. This programme entered the Guinness Book of World Records for “the most bank accounts opened in one week as a part of financial inclusion campaign...” During the August 23-29, 2014 week, 1.81 million bank accounts were opened by Indian banks. Till date, 260 million bank accounts have been opened.

According to official figures, DBT has led to a savings of Rs 50,000 crore (($7.5 billion) over the last three years. This is roughly the same as the subsidies under DBT in 2016-17. This means DBT has led to the savings of nearly one year's worth of subsidies. In 2016, DBT covered 84 schemes across 17 ministries, two-and-a-half times more than 34 schemes in 2015. As on date, about 330 million people, or about 25 per cent of all Indians receive subsidies via DBT in their Jan Dhan accounts.

“The savings figure is expected to significantly rise further in the next financial year as the government will be bringing a total of 533 central payout schemes in 64 ministries under the DBT mechanism by March 31, 2018 as per the directions of PM Narendra Modi,” a report in The Economic Times, India's leading financial daily, said.

Demo to help

On November 8 last year, Prime Minister Narendra Modi unveiled, arguably, the most revolutionary reform measure taken by his government. The demonetisation of Rs 1,000 and Rs 500 notes, which sucked 86 per cent of liquidity ($210 billion) out of the system, hit at the root of several problems ailing the Indian economy.

Corruption hits the last man in the queue more than any other person. The value of cash in circulation in the Indian economy is about 12 per cent of GDP compared to 4-5 per cent in developed economies. Demonetisation is expected to reduce the cash component of the Indian economy by a third. This will bring many more economic activities overground. Hitherto unreported economic activity will now be reported to the authorities and taxes will be collected on the same, leading to higher government revenues. And this, in turn, will lead to an expansion of the list of DBT beneficiaries.

It will almost certainly also improve India's poor rank of 76 in the next edition of the Corruption Perception Index brought out by Transparency International and also lead to an improvement in India's rank in the Ease of Doing Business Index.

Higher growth to lift all boats

The expected buoyancy in the government's revenues as a result of a greater percentage of transactions coming within the tax net, will give Finance Minister Arun Jaitley sufficient headroom to further reduce both direct and indirect tax rates - as he has done, albeit in a limited way - in the Budget for the coming financial year.

This will undoubtedly push growth and help generate jobs for many of the millions of youngsters joining the workforce every year.

JAM session

The government has been using a combination of Jan Dhan, the Aadhar card (a unique identity number given to every Indian) and mobile phones (which have an 85 per cent penetration across India) to directly transfer cash in lieu of subsidies to the accounts of intended beneficiaries.

Then, the PMSBY, which offers a cover of Rs 2 lakh ($3,200) for accidental death and disability, has got 78 million subscribers. The premium of Rs 12 (18 cents) per annum is its primary attraction. This scheme is the first attempt at providing a universal social security net for the ordinary Indian.

The APY, which offers old age pensions ranging from Rs 1,000 to Rs 5,000 per month, has got almost five million subscribers and government officials are hopeful that subscriptions will pick up over the coming months and years. This contributory scheme is open to all citizens between 18 and 40 years of age and the government picks up 50 per cent of the tab for the first five years.

Aadhar pushes cashless economy

Last year, Parliament passed the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Bill, 2016. This enabled the government to expand the scope of the Direct Benefit Transfer (DBT) scheme to better target beneficiaries of subsidies and other benefits. The Aadhaar card is used for schemes such as MNREGA, Jan Dhan Yojana, the public distribution system and pension and PF schemes.

Aadhaar decoded

It is a 12-digit unique identification number issued to residents of India. While enrolling for the number, applicants have to furnish biometric data such as photograph, finger print or iris scan and demographic information such as name, date of birth and address. This data is stored in a back end that uses technology to ensure that the same person is not issued multiple numbers.

Cashless route to prosperity

Demonetisation has, admittedly, resulted in a temporary consumption squeeze. But remonetisation, now almost complete, is expected to result in higher levels of consumption in the months ahead.

This will definitely lead to a surge in demand for consumer durables, FMCG, cement, steel and a host of other goods and services. And this, in turn, will lead to an improvement in job creation opportunities in the economy.

This latest gambit, the Prime Minister has promised, is only the first move in a long and protracted battle against black money (unaccounted income). There is no evidence yet that the ordinary Indian is upset at Modi for the short-term inconvenience that many have been subjected to.

If Modi can deliver on his promise of freeing the country from the scourge of black money, he will have achieved the impossible. And this alone can improve the lot of the ordinary Indian.

Middle class India

India has a middle class that is 300 million strong. By 2030, this figure is expected to rise to 500 million. The JAM formula and demonetisation will only help hasten this process. As many more people step up into the neo middle class, consumption demand for a host of products and services will rise.

And this is where companies such as Unilever's Indian subsidiary, Nestle's Indian arm and Mondelez India, along with their international supply chains, can step in to address the needs of this new class of consumers. This is an emerging market segment that will, over the next decade, emerge as one of this country's most important demand generators.

Addressing this demand could make the difference between winning and losing the battle for the Indian consumer. As the JAM initiative addresses the issue of demand at the bottom of the pyramid over the next few years and the demonetisation programme increases the size of the economy by turning the “black” economy into “white”, this trend will increasingly become more evident.