Ensuring reliable financial services to poor households in India has been an important and long-standing policy imperative of the government. Despite sustained efforts, millions of rural and urban poor continue to lack opportunities to borrow, save, insure themselves, and access the numerous services of India’s formal financial sector. Now, the Indian government has the unprecedented opportunity to achieve this fundamental but protracted goal of financial inclusion.
Advances in technology and new business models have provided them with a powerful tool—an electronic payment or “e-payment” system. There is a compelling case to be made for automating government payments, which includes efficient and reliable financial interactions with poor households in the informal economy as well as full financial inclusion of India’s poor.
This report explores the current inefficiencies in government payment systems and quantifies the potential financial and strategic benefits of making government payment flows electronic. It finds that an e-payment model can reduce current payment inefficiencies estimated to be Rs. 1 lakh crore annually (US$22.4 billion), with a large share of that amount—Rs. 71,000 crore (US$18.3 billion)—attributable to welfare schemes disbursed by the government. Top-down analysis suggests that setting up the infrastructure to enable an e-payment model will entail a onetime cost of Rs. 60,000 to 70,000 crores (US$13 billion to 15 billion)—an amount that can potentially be paid back within one year from the savings incurred through an e-payment infrastructure.