Managing public expenditure needs a digital boost

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Finance Minister Nirmala Sitharaman, in her budget speech 2022, mentioned some significant reforms towards government procurement that have happened over the past few months. These are welcome developments in a landscape marked by State’s weak budget execution capacities. However, there needs to be a stronger push towards adopting public finance management reforms to enable the government to manage its finances better.

Take for instance the nearly Rs 2000 crore of idle funds recently unearthed by the special task force set up by the Tamil Nadu government.  State Finance Minister Dr. Palanivel Thiaga Rajan called it a “trailer” with the whole picture across thousands of bank accounts yet to be seen.

The issue of unspent funds or ‘idle float’ lying in government accounts is, of course, not a new revelation. Last September, the Comptroller and Auditor General (CAG) of India highlighted a whopping Rs.4.72 lakh crore remaining unspent in FY19, citing poor budget formulation as a leading cause. Former CAG Rajiv Mehrishi had also pointed to the problem of unsatisfactory monitoring of allocated budgets and suggested an “end-to-end enterprise-based IT system” to improve expenditure tracing.

Idle float is a symptom of inefficient use of public funds. The funds stuck in the bank accounts of various government agencies as float add to the public debt. This is ironical for a low middle income country like India, since government cannot meet it expenditure commitments from its own funds and has to borrow additional funds adding to the fiscal deficits and the challenges that come in its wake. Downstream macro-effects include lower credit availability for the private sector and eventually, slower economic growth.

It also has a huge opportunity cost in the form of scarcity for those Implementing agencies (IAs) that have spent their allocations and need funds urgently. These IAs then struggle with mounting arrears and unpaid dues to contractors. This even as funds are available aplenty with other IAs and programs. This paradox of simultaneous plenty and scarcity manifests on the ground as poor service delivery to citizens.

Issues galore, reorientation a must

How does public finance work in India? If visualized as a tree, the Centre or states are at the top and transfer funds to lower branches representing state, district, local governments and panchayats. For most Centrally Sponsored Schemes (CSS), there is a multi-layered fund release mechanism. Each step of fund flow requires documentation, usually utilization certificates (UCs), to prove previous payment tranches have been used up. When this is done, the relevant state-level department releases more funds.

A delay at one branch – say, at the district level – for any reason often hampers the smooth release of funds to the next one, i.e. the block or panchayat level. As a result, funds often get stuck for years. Furthermore, after tranches are transferred, they are often not spent within a stipulated time period either on account of work not being done on time or delays in reporting.

Importantly, the flow of information is no smoother, resulting in a lack of observability on expenditure status. In most cases, data at the primary unit of activity (e.g. teacher attendance or weight measurement of a child by an Anganwadi worker) is fed manually and gets digitized “manually” by an army of Data Entry Operators (DEOs) who enter program data in computers. This same data, often with compromised authenticity, moves from one IT system to another. This too is done through another round of manual entries, not automatically through data exchange protocols between interoperable systems.

Overall, the data that resides in the system is recorded away from the primary unit of activity, and through a series of manual processes between disconnected information systems. This leads to a gap in the reporting of physical and financial progress.

While the Public Financial Management System (PFMS), managed by the Controller General of Accounts (CGA), has certainly helped such flows become more traceable over time, the scale of the issue demands a mix of process and technology interventions.

So, what’s the solution?

There is an urgent need for these disparate systems to ‘talk to each other’. This will require an approach that integrates digital principles with public finance management (PFM) principles. These integrated ‘Digital PFM (DPFM) principles’ can transform the PFM ecosystem and improve governance and development outcomes. Two specific ones, Just-in-Time (JIT) and Single Source of Truth (SSOT), are starting points of the DPFM journey.

A JIT funding approach for centrally sponsored, central sector and state schemes will enable real-time funds transfers to the payee (contractor or individual) instead of it being parked in the bank account of implementing agencies (IAs). It would negate the need for pre-loading or funds transferred in advance.

It’s analogous to a bank issuing a credit card and defining a spending limit on that card. It authorizes an individual to spend up to a specific limit without transferring advance money into that individual’s bank account. Similarly, the Centre and state governments can define the spending limit of IAs for their respective schemes, without transferring money in advance. Money flows directly into the bank account of the contractor or beneficiary, only when the work is complete and the money is due. Modern technology allows this to work seamlessly with some tweaks in work practices. In fact, Rule 230(7) of the General Financial Rules, 2017, recommends JIT but unless it is implemented in principle and totality, the government and citizens cannot reap the technological benefits.

Similarly, pursuing an SSOT will enable aggregating scheme/program data at a single point that is accessible to a variety of public departments and agencies. This would foster higher systemic accountability and transparent reporting by individual departments and program heads. It will allow quick and, in some cases, algorithmic decisions. Such high-fidelity data is critical to the functioning of a JIT system.

Way forward

DPFM principles such as JIT and SSOT do not require an overhaul of current systems. They all have an associated technology play that just needs to be layered on current systems with tweaks in work practices.  The PFMS is one part of the solution. It already tracks funds and expenditures. It can be re-factored a little, or a new module for JIT can be created to meet the requirements of real-time fund release and improve visibility.

Such enhancements will improve scheme monitoring and reduce float. If JIT can be integrated with the program MIS, it can help auto-trigger both payments from the Consolidated Fund of India or State to a department or program as well as to end beneficiaries. This would help administrators focus more keenly on service delivery than simply approving payments at respective branches. And one must not look far for inspiration. The Government of Odisha is implementing the Just-in-Time rule for various schemes such as the ‘Grant-in-Aid to Special Schools’ under Social Security & Empowerment of Persons with Disabilities Department (SSEPD) and the ‘Urban Wage Employment Scheme (MUKTA)’ under Housing and Urban Development department.

The Centre and States would do well to consider these smart solutions in their existing PFM architecture. The wins would not just be mutually beneficial; but have long-lasting positive impacts on state capacity, government savings, welfare planning, and service delivery.

This blog first appeared as an Op-ed in the Times of India, on March 9, 2022.

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Grassroots women leaders transforming lives

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In collaboration with multiple partners across countries, MSC has collated inspiring stories of grassroots leaders. The booklet shares a snapshot of their journey, experiences, and insights and is a testimony to their grit and resilience. It also gives us a glimpse of the hardships women grapple with at the last mile.

RBIH whitepaper: Gender and finance in India

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MSC worked with the Reserve Bank Innovation Hub (RBIH) on a whitepaper on “Gender and Finance in India” for its स्व-नारी (Swanari) program. The paper discusses the landscape of gender and finance in India and highlights the main gaps in gender. Its premise is that applying a gender lens to financial inclusion is essential to understand barriers women face around equal access, usage, and quality of financial services offered. The paper analyzes public data on gender gaps in savings, credit, insurance, and pensions. Using inputs from experts and stakeholders, it attempts to understand key gender-based barriers. The whitepaper arrives at crucial problem statements around access, usage, and quality of financial services for the Swanari program. It also shares some promising innovations, good practices, and stories of female users and financial services providers. The paper ends with a call to move “toward gender-intelligent banking” and shares critical enablers that could catalyze women’s financial inclusion.

Would a Business Correspondent Network Manager’s (BCNM’s) strategy to customize incentive structure change the agent business?

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Eko India Financial Services is a new-age banking correspondent network manager (BCNM). It offered three progressive plans in its old incentive structure, shown in Figure 1, to more than 200,000 agents to take care of their business needs.  The agents could choose the monthly plans which had different subscription charges based on their commission rates.

Figure 1: Old subscription plans offered by Eko to its agents (exclusive of Goods and Services Tax (GST))

However, agents and their needs are different in India. Devnarayan Chaudhary, a Business Correspondent (BC) with Eko, operates from Vishwakarma Industrial Area near Jaipur, Rajasthan. He has been associated with Eko for more than six years now. He provides multiple services like domestic money transfers (DMT), cash withdrawals through the Aadhaar-enabled Payment System (AePS), bank balance inquiry, and utility payments through the Eko platform.

As Devnarayan’s outlet is close to an industrial area, his customer base primarily comprises migrant workers and truck drivers who send money to their families regularly using DMT services. Although his primary source of income comes from a cybercafe and cellphone selling shop, he is a well-performing BC agent on Eko’s platform. He conducts 80-100 transactions daily and earns between INR 30,000 to INR 40,000 (USD 400-500) per month by providing DMT services at his outlet. 

Devnarayan has used Eko’s Supersaver plan till now. He paid INR 500 (USD 7) monthly and received a commission of 0.50% of the transaction value each time he transacted through the portal. While he was satisfied and earning well with his existing plan, he wanted more.

In contrast, Dharm Raj, another agent with Eko for three years. He operates from Samastipur, Bihar, and faces a unique set of challenges with Eko’s plans. He mainly serves beneficiaries of various government schemes. They come to his outlet to withdraw cash through AePS.

He conducts three to four transactions daily and earns between INR 1,000-2,000 (USD 12-20) in a month, using Eko’s Basic plan. Like Devnarayan, Dharm Raj’s primary source of income is a cybercafe.

Agents like Devnarayan and Dharm Raj face multiple challenges around the incentives received as an agent. They have varied key demands, listed in Figure 2.

Agents have a choice. Faced with low revenues, agents often reduce or eliminate transactions on a platform and move to competitors’ platforms that offer higher commissions and easy options to switch. Such departures can reduce the usage of the platform and impact Eko’s business model, which is built around agent-assisted use. In India, the DMT and AePS market has become highly contested of late. Many nimble players have entered the market and lured agents with competitive services like higher commission, better customer support, and more robust field support. This competition has reduced the barriers to switching from one platform to another with lower setup costs and on-boarding requirements.

Thus, a growing BCNM like Eko must set the prices that provide value to their last-mile agents for higher usage and motivation.

Reinventing the existing incentive strategy: Addressing the challenges faced by agents

Eko cannot follow a cookie-cutter approach to address its agents’ varied needs and requirements. Thus, it decided to remodel its existing subscription plans to meet the needs of different agents. Eko designed a new set of plans based on the information and data in its extensive “agent transaction data bank” to address its agents’ needs. MSC (MicroSave Consulting) conducted an assessment to understand the agents’ perceptions around these new plans. The assessment focused on:

Figure 3: Focus of the assessment conducted by MSC

After completing the assessment, MSC recommended the “Good-Better-Best (GBB) framework” for improvements to the subscription plans, which would address the challenges faced by agents like Devnarayan and Dharm. The GBB framework helps Eko design a strategy that: 

  • Provides variable incentives for agents who have different turnovers, use specific services, or value features like longevity, subscription price, and commission value of the plans differently; 
  • Introduces plans with minimal entry barriers for all the existing and new price-sensitive agents who adopt Eko; and
  • Enhances the suite of value-added features for high-potential agents. 

GBB facilitated a subscription model that works as a tool to build solid relationships between Eko and its agents. Moreover, the model provides a seamless and sustained brand experience.

A sneak peek at the GBB framework for Eko

GBB takes a holistic approach to a solution to cater to differentiated needs and the value of differently-priced subscription plans for agents.

Figure 4: The GBB approach suggested by MSC, Source: Harvard Business Review

What implementing GBB means for the agents and Eko 

Based on this recommended approach, Eko tweaked its plans to improve the overall incentives it provides agents to suit agent-specific needs better. The new plans have changed how an agent chooses a subscription plan. 

  • Now, Devnarayan can choose plans with extended validity. He chooses a 365-day plan and does not bother with monthly payments. 
  • Dharm Raj earns a higher income on cash withdrawals through AePS in his village. His overall earnings have also increased. He can now switch plans on specific days when customers receive subsidies. His outlet sees a high volume of transactions.

Other Eko agents can offer additional services through Eko and thus met a broader range of customer needs and serve more customers. Furthermore, the new scheme provides multiple options to rebalance, and even add e-value through UPI, which reduces their dependence on distributors. The option without distributors now offers a higher commission to agents like Devnarayan.

These changes supported different agents by offering more flexibility, convenience, and higher revenue due to increased incentives across multiple products and services. Since the launch of the scheme in July 2021, more than 68% of agents have taken up the new plans. Eko has increased revenue and provided new sources of earnings to its extensive agent network through the platform. 

What the new pricing strategy means for Eko’s future 

The changes Eko introduced have supported the increase in agent incentives. But will the new scheme prevent agents like Devnarayan or Dharm Raj from moving to competitors offering them other unique benefits? We cannot say for sure.

With an increasing number of BCNMs in an ecosystem that provides agents with higher increasing incentives, competing providers will find it challenging to maintain agent stickiness. Similarly, these will not be the last set of plans Eko launches to support its agent network. Every time the agent incentives and plans are redesigned or changed, the Good-Better-Best framework and its principles can guide Eko.  

Increased competition will influence the BCNM ecosystem through new product features, convenience, and commissions. We expect things to heat up—for the better—as we move forward with new emerging business models, rapid technological innovations, state initiatives, and more players entering the market.

Women’s agent network—the missing link in India’s financial inclusion story: A supply-side perspective

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Over the past decade, business correspondents (BC) agent outlets have grown by nearly 45% CAGR compared to bank branches, which grew at 6.4%. However, female BC agents represent only 10% of the BC agent network. Mounting evidence points to increased financial activity by women if they transact with a female BC agent.

This note discusses a supply-side perspective on expanding women’s agent network in India, based on a survey with private BC network managers. We discuss the efforts made in several fronts to recruit and include more female BC agents and the challenges supply-side providers face in the process. Based on the study, we conclude with recommendations to increase understanding and appreciation among service providers about gender policies and practices and their effect on cash-in-cash-out (CICO) operations.

Are we over-selling start-ups as a career option?

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A little personal history

In 1983, as I was training to be a chartered accountant, I worked with Peter Risdon and Lord Trevor-Roper on a start-up to challenge the optician’s monopoly on reading glasses in the UK. In those days, basic reading glasses cost more than £40 a pair – even though they could be imported for less than £1. Opticians asserted that people needed an eye test to identify the appropriate reading glasses. This was clearly wrong, and as a result of our “For Eyes” start-up, the Optician’s Act of 1958 was amended. As a result, in the UK, as in the rest of the world, anyone can buy reading glasses for £1.

We were naïve entrepreneurs and quickly ran into the classic start-up’s liquidity problem as we had to pay suppliers before we had the cash from the roaring sales at our modest shop in Clerkenwell in London. After much heart-searching, I pitched our business to my Father and secured a loan of £10,000 – no small sum. We struggled on, refused a take-over bid (I said we were naïve), and eventually For Eyes collapsed, and I had to return to my Father empty-handed, only able to offer apologies.

Harsh realities facing start-ups across the globe

This story is common amongst start-ups across the globe – friends and family are roped in to finance aspirations and dreams of young wannabe entrepreneurs with big plans and small bank balances. In the last decade, we have lionized these entrepreneurs. We have placed them on pedestals and sold the idea of building “unicorn” tech start-up companies as part of the digital revolution. Some are realizing those dreams, and many are developing valuable products and services to make our lives more convenient.

But the success stories are not the norm … The Global Entrepreneurship Monitor (GEM)’s research shows that there are “about 300 million people who are trying to start 150 million businesses worldwide … there are about 50 million new businesses each year”. So, globally, there are roughly 137,000 start-ups daily … but around 120,000 businesses close each and every day.

For every single success story, there are around ten failures. Investopedia notes that “in 2019, the failure rate of start-ups was around 90%.” It highlights that “reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, not being an expert in the industry, and particularly for, tech start-ups, wrong timing.”

A recent NetshopISP article noted that each year, “1.35 million [start-up] businesses are tech-related.”

The popular image of tech start-ups is of geeky students operating out of their dorms – but these are less common and indeed less successful than their more mature, experienced counterparts. US Census Bureau and MIT research showed that tech entrepreneurs aged 60 years are nearly four times more likely to found a successful start-up compared to entrepreneurs who are in their mid-20s. The average age of a successful start-up founder is 45.

StartupsUK highlights a similar pattern, noting that, “Most small business employer owners and co-owners fall into the 35 to 44 (25%), 45 to 54 (31%) and 55 to 64 (26%) age categories. The proportion in older cohorts is much smaller; just 7% over 65.”

Source: Age and high growth entrepreneurship – Pierre Azoulay et al 2018

MSC’s experience with start-ups in Asia

MSC’s acceleration labs and related work in India, Bangladesh, and Vietnam nurture start-ups in their growth stage to deliver appropriate solutions to serve low- and moderate-income (LMI) people. Due to the extensive support that these start-ups receive from the lab, their probability of success is high. Though not representative of the whole market, these start-ups highlight interesting perspectives and data on the start-up universe.

1. Selection funnel – the blessed 4%

  • There are too many ideas, but very few of them were selected for support through the labs. MSC-supported acceleration programs have already received over 1,100 applications. However, only 44 (4%) of those start-ups have received or are receiving support.

2. Age of entrepreneurs

  • In India, the Business Standard reports, “The workforce in the age group of 45-54 years (37 percent) are hesitant to start their own business as compared to the workforce in the age group of 25-34 years (72 percent) and 35-44 years (61 percent).” So it is unsurprisingly perhaps that the average age of the founders in our cohorts in India is 34.5 years – experience makes an important difference. However, we have also seen a few young co-founders setting up start-ups. However, most of the start-ups have co-founders with complementary capabilities to mitigate the risk of failures and add years to their cumulative experience as they steer the start-up.

3. How many have borrowed from family and friends? How many still owe family and friends?

  • Almost all the start-ups in our cohorts have taken money from friends and family – unsurprising considering the relatively early stage of their ventures. It is difficult (and sensitive) to ascertain if they still owe money to their friends and families. However, one-third of the cohort start-ups have already raised money from institutional investors – we can safely assume that this could help them return, at least part, some of their borrowings from friends and family.

4. Type of support-services provided

  • Start-up founders and their teams build digital products. However, it requires an extensive understanding of the LMI segment to ensure user value. Our labs support founders to understand their customer segment better and design products with a better market fit. This ensures quicker adoption and higher usage of the products and increases the success rate of the start-up. For example,  Lakshya is a digital savings platform that provides access to formal savings and insurance to India’s LMI segments. The lab helped them with customer segmentation and enabled Lakshya to design financial products that catalyze the economic well-being of their customers.
  • The rise of digital engagement has enabled founders to launch products with near real-time decision-making capability on processes like customer onboarding, underwriting, payments, and so on. In this context, start-ups must have a strategy to deal with poor quality of data architecture, management, and analytics. Our labs are mentoring start-ups to formulate robust strategies to develop and implement efficient data-centric processes. Finarkein Analytics focuses on simplifying the information value chain through its unique and innovative data analytics solution. Our lab supported them to understand the account aggregator data ecosystem in India, streamline their current processes, and formulate a robust pricing strategy for their services.
  • Go-to-market is key to scaling up product adoption and usage. Many early-stage start-ups suffer despite achieving product-market fit as they struggle to onboard the right customers to use the product. Insufficient product traction directly impacts the investment cycles and becomes a potential risk for failure. Our labs help start-ups identify channels to reach LMI customers efficiently and collect feedback from these users. This enables founders to refine the product and achieve a larger customer base. Fundfina is a digital lending platform providing access to formal credit to micro and small enterprises (MSEs) in India. The lab’s support helped them understand the segment-specific behavior and craft a marketing strategy to reach 10 million small enterprises in the next five years.
  • Undoubtedly collaboration is key to startup success. Businesses with innovative products and limited resources must find partners to scale efficiently. Through our labs, startups get a chance to interact and work with partners/enablers like non-banking financial companies (NBFCs), farmer producer organizations (FPOs), corporates, policymakers, banks, and so on in the ecosystem. This results in quick scaling, increased efficiencies, and better unit economics, which directly contributes to the founder’s success. Whrrl, an agritech startup from our cohort uses a blockchain-based disruptive financing model to fund farmers. Our lab has enabled them to partner with various FPOs, warehouses, and agri-institutions to engage farmers.

These challenges were amplified by the COVID-19 pandemic.

These trials and travails reflect the challenges that even the most successful start-ups face … and, despite being in the carefully selected top 4% of start-ups, and despite the extensive support from the labs, many struggle to survive.

The concern

Despite this, start-ups are promoted as a credible career option for young people more than ever before. One colleague received a mail from his son’s high school promoting the idea of start-ups as a career. And the papers are full of success stories, but rarely mention the many more failures. Society seems to favor glorified stories on young adults making it big, without going into too many details of the struggles involved. We risk encouraging millions of, often naïve, aspirant entrepreneurs to start a business when they are least equipped – financially and in terms of experience – to do so. We may well be doing them a disservice by hyping tech start-ups and selling the unicorn dream. Furthermore, as I can attest from personal experience, the need for financial support drives young, poorly resourced entrepreneurs to borrow from their families and friends. In >90% of cases, these loans will not be repaid from the start-up, leaving important relationships fractured and damaged. Is this a price worth paying?