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Smart payments: The future of government digital payments in India

Posted on by Saumya Dixit

Decoding payment challenges in India’s government fund flow ecosystem

Between 2016 and 2023 the Government of India (GoI) increased its annual expenditure in the social sector by 134% from USD 108 billion (INR 9 lakh crore) to USD 253 billion (INR 21 lakh crore). However, higher budgetary allocations do not guarantee a high impact, as ample evidence shows that the budget remains unspent. Outcomes remain low even with the spent budget.

A major source of these deficiencies is the challenges in public finance management (PFM), especially those related to fund release and payment processing that continue to constrain government officials’ capacity to execute programs on the ground. The twin challenges of unspent funds and unpaid dues have plagued government payments in India. These payments include three types of payments, from the government to other government departments or tiers (G2G), government to businesses or contractors (G2B), and government to individuals or people (G2P). For instance, at least 56% of the USD 37 billion (INR 3.1 trillion) released toward centrally-sponsored schemes in FY 2023 remained unspent with the single nodal accounts (SNAs) of states to implement programs until March 2023. Moreover, unpaid dues by the government added up to almost USD 115 billion (INR 9.5 lakh crores) in various economic sectors in 2020.

While India’s direct benefit transfer (DBT) system for fund transfer has gained global acclaim, a larger universe of centrally-sponsored and central sector schemes involve conditional government transfers. This means the transfers depend on the fulfillment of physical milestones. Simple examples include a payment made to a contractor on the completion of a section of rural road construction under the Pradhan Mantri Gram Sadak Yojana (PMGSY) or payment to an empaneled health service provider against treatment under Ayushman Bharat or to Anganwadi workers for their services. Most schemes require a web of manual processes before payments from the consolidated fund of India (the primary government account for all revenue received by the government and expenses made by it) or the state (the similar account at the sub-national level) reach the beneficiaries—businesses in the case of G2B payments, and people in the case of G2P payments.

The program management system for most schemes faces process-related challenges, such as suboptimal workflow and outdated IT systems; people-related challenges, which include administrative burden and diffused accountability; and finance-related challenges around the flow of funds contingent on multiple layers of approval. High budgetary allocations may not necessarily translate into on-ground impact unless these key constraints related to fund release and payment processing are addressed. These challenges are not unique to Indian government stakeholders but are faced by governments across the world.

Digital revolution in India’s PFM landscape

The Indian government has deployed digital technologies to keep pace with the increasing volume and value of their payments at the center and in the states. The public financial management system (PFMS) has been at the core of the center’s efforts. It has evolved from its humble beginning in 2009 when it tracked funds released under all programs sanctioned by the GoI. Today, it has grown into a centralized transaction system and platform that provides end-to-end financial management services to all stakeholders. Similarly, most states use their respective versions of integrated financial management information systems (IFMIS) combined with the PFMS.

Progressive reforms in the PFM have ensured a gradual shift from a prescriptive fund release system to a more demand-driven fund release system. These reforms include the deployment of Single Nodal Agency (SNA) and, more recently, pull-based fund transfer systems, such as SNA-SPARSH for the centrally sponsored schemes (CSS). SNA reforms, launched in 2021, have reduced the float in the system- CSS funds sit in just around 3,300 bank accounts as opposed to around 1.8 million earlier, and led to better cash management. Moreover, the SNA dashboard has improved the observability and monitoring of funds. Recently, India’s Finance Minister also spoke in the parliament about the SNA reform and claimed that it led to an estimated savings of USD 1.2 billion annually.

However, the float is yet to be eliminated. Also, the funds are still being ‘pushed’ in advance, albeit with fewer intermediate halts, at shorter spurts, and with a good view of where it is at any given time. The gap between the fiscal and physical events has also reduced, but not entirely eliminated. This blog discusses the smart payments ecosystem that endeavors to move government payments to a “just-in-time” release. This means smart payments will pull funds from the Consolidated Fund of India (CFI) and pass them on directly to the beneficiary’s bank account in real time when payment for the work is due.

Smart payments to solve challenges in payment processes and fund disbursement

The concept of a smart payments ecosystem is built on digital PFM principles, such as a single source of truth or data, digitization of inputs at source, and demonopolization of access to services. At its core are “rules as code” or “if-then-else” algorithms that trigger actions and outputs when pre-defined payment conditions are met. Smart payments can be applied across diverse government payment scenarios, such as G2P, G2B, or G2G. We look at major components that must be developed to enable the concept of smart payments below:

  1. A single registry that acts as a single source of truth and is used to manage the payer and payee’s profiles;
  2. A business rules engine that configures rules and validates payment conditions;
  • A payments engine with an entitlement calculator and a “decision-to-pay” trigger;
  1. A “just-in-time” system that rides on a virtual treasury single account (VTSA) and enables the assignment of virtual spending limits, such as a credit card instead of actual fund transfer as “authority-to-spend” to spending units, and allows them to pull funds in real-time per their needs.

As seen in the figure below, the first three points cover aspects related to payment processing, and the last one deals with fund disbursement.

Figure 1: The smart payment ecosystem

This versatile solution can be configured or developed to complement existing government processes and platforms, such as any existing workflow management solution and public fund management system.

Such a smart payments ecosystem is currently being experimented with, under the urban wage employment program, MUKTA, of the Government of Odisha’s Housing and Urban Development Department (HUDD). Early results from the impact evaluation have been promising. Within a few months of the pilot’s launch, the idle float has been eliminated, along with a 57% reduction in payment delays to beneficiaries and a significant reduction in administrative burden on officials. Complete implementation of the solution will reduce payment delays by 66%, from 120 days to less than 30 days—eventually to less than seven days—and reduce payment approval processing time from 16 to five days.

Lessons for India and the world

Besides the design of the smart payments solution, advocacy and consensus-building among government stakeholders and ecosystem players have been key planks in MSC’s journey to solve PFM challenges. MSC’s effort led to the adoption of solutions and influenced policy and regulations. Both government agencies, such as the Ministry of Rural Development and National Health Authority, among others, and state governments of Bihar, Punjab, Tamil Nadu, Haryana, Assam, and Uttar Pradesh have shown willingness to implement smart payment solutions. The Government of Odisha has been a key implementing partner for this solution. Our successive blogs will discuss key lessons from these engagements and how they have helped us in our journey.

Given the sheer amount of transfers that governments make, the deployment of a smart payment system has the potential to unlock billions of dollars in government funds. For instance, in India alone, for FY 2024-25, the Central government alone has set aside USD 250 billion across 170 central sector and centrally-sponsored schemes. We hope that implementing the smart payments solutions system will provide the necessary fillip to expenditure management reforms that will organically link all the digital transactions along the expenditure chain, from budgeting to sanctions, raising invoices, approvals, and payments, and monitoring. This will significantly reduce the administrative burden on officials and enhance public service delivery across sectors, such as health, education, agriculture, and water and sanitation, to help governments realize their commitments and achieve developmental goals for their countries.

Overcoming the roadblocks in India’s rural road connectivity program

Posted on by Saumya Dixit

The urban skew in infrastructure development

Vast income disparities persist between urban and rural India. Nearly 25.7% of the rural population remained trapped below the poverty line, compared to 13.7% in urban areas.

The Indian government has been acutely aware of this gap and has thus made focused interventions to improve rural infrastructure. The Pradhan Mantri Gram Sadak Yojana (PMGSY) is one such program that the government launched in 2000. It has become one of the Indian government’s most celebrated programs. Under PMGSY, the government seeks to connect unconnected rural areas through all-weather roads to ensure access to economic and social facilities in nearby urban centers. This includes access to markets, healthcare, and education.

Since its launch, the program has overseen the completion of nearly 760,000 km of road length as of April 2024. The project is in its third implementation phase and intends to add another 100,000 km of road by the end of March 2025.

Figure 1: Two decades of connecting rural India

Source: OMMAS dashboard

An overview of the PMGSY

The National Rural Infrastructure Development Agency (NRIDA), under the Ministry of Rural Development (MoRD), Government of India, executes and monitors the  PMGSY program. PMGSY follows a three-tier structure. The NRIDA, at the national level, coordinates with multiple State Rural Road Development Agencies (SRRDA) that oversee the execution of works via the District Project Implementation Unit (DPIU) at the last mile.

The program is divided into two phases: construction and maintenance. The construction phase is usually completed within a year, after which the road enters the maintenance phase for the next 10 years. Both phases are executed on a separate set of operating principles and are planned and monitored through different IT systems to ensure smooth and efficient operations. The construction phase is monitored via the Online Management, Monitoring and Accounting System (OMMAS), whereas the maintenance phase is managed via electronic Maintenance of Rural Roads under PMGSY (e-MARG).

Multiple operational and systematic challenges continue to impede the program

Right from its inception, PMGSY had well-defined operational and financial guidelines for all stakeholders. It has continuously adapted to keep pace with changing times and has added new policies and technical interventions. However, MSC’s diagnostic study of the program’s construction phase revealed significant scope to improve efficacy and efficiency.

MSC conducted this study in Haryana, Madhya Pradesh, and Punjab to identify key issues. We used a framework of digital public finance management (PFM) principles, such as a single source of truth or data, digitization of inputs at source, and de-monopolization of access to services. We identified the following issues through the study:

  • Low visibility of fund availability for stakeholders: The public finance management system (PFMS) only captures the amount released from the center to the state. However, once the fund leaves the Single Nodal Account (SNA) at the state level, the MoRD has limited visibility on the funds allocated to and used by DPIUs. Fund status is only accessible once district units voluntarily upload spending summaries, subject to their discretion. This lack of fund visibility and bill traceability in the OMMAS often results in the underutilization of funds or impedes their timely release.
  • Manual feeding of work data in the OMMAS: All payment conditions are recorded manually with a paper trail. For example, entries from the measurement book (logbook maintained by DPIUs to monitor and record construction activities), and the measurement bill book (logbook maintained by DPIUs to calculate and record payments for construction completed), are uploaded with only values entered, into the OMMAS. Compliance-related or other supporting documents such as quality test reports, labor compliance certificates, contractor bills etc. are not uploaded on OMMAS. Hence, the team that processes payments has to wait for and rely on the physical file that contains paper documents. This increases the administrative burden, leads to duplication of effort, and delays payment processing.
  • Entitlements are calculated manually and uploaded on the OMMAS: The DPIU staff calculates all entitlements and makes adjustments manually based on contract service level agreements (SLAs), as well as other adjustments, such as penalties and advances, among others. The basis for the final payment calculations is not traceable in the OMMAS. This leaves scope for staff discretion when they finalize the payment amount and prepare the payment voucher in the OMMAS.
  • Low transparency or traceability in compliances linked to a contract: After contracts are awarded, the OMMAS only receives the tender information and details around the award of contracts through the digital procurement system called the Government eProcurement system of NIC (GePNIC). These details include bid type, date, number of bids, and bidder’s name and contract value. However, contract clauses are not exported to the OMMAS, and staff have to maintain physical records of the contract, which leads to limited transparency and traceability.

Integration of the smart payments solution

Based on the diagnostic study, the MSC team recommended the smart payments solution (SPS) to facilitate more efficient fund management and rule-based payment processing. The major components designed to enable SPS implementation were as follows:

  • Single project registry (SPR): The SPR will be a reference data repository for all PMGSY projects based on the principle of a single source of truth. The SPR will hold all project-related data and information at one point and enable access to real-time information to and from other applications. This information includes vendor data, contract milestones, and payment conditions, among others.
  • E-measurement book (eMB): The proposed eMB will be a part of the modular architecture and work in sync with the OMMAS as a workflow management system. The eMB will enable data entry of a contractor’s work at the source digitally and allow rules-based processing to fulfill compliances. The data processed in the eMB will trigger the smart payments engine (SPE) to automatically generate the measurement book and measurement bill book, thus eliminating the need to record work data and undertake any payment calculation manually. Additionally, the eMB will integrate with the existing OMMAS system, allowing for seamless data exchange.
  • Smart payment engine (SPE): The proposed SPE refers to a module that runs if-then-else algorithms at the backend. It uses available inputs in electronic form and other payment conditions. The SPE will automate invoice processing and voucher creation, and provide the necessary trigger to release funds to vendors.

Lastly, the integration of SPS with the treasury single account (TSA)—currently piloted by NRIDA—will enable the “just in time” functionality. This, in turn, will ensure direct disbursement of funds to the contractor’s bank account instead of cascading through multiple levels.

The three components will function in tandem. The SPR will act as a central hub for all project data to ensure a single source of truth. The eMB and SPE will facilitate compliance through rule-based processing and ensure frictionless payments to beneficiaries. This will pave the way for a more streamlined and automated system that promises increased efficiency and transparency. MoRD had shown full commitment to deploy the SPS.

 A blueprint for other infrastructure projects in the country

Once implemented individually or in tandem with the TSA, the SPS will improve program monitoring and efficiency in the short term through real-time updates, fixed locus of accountability, and increased observability. In the long term, these interventions, combined with the TSA, will ensure frictionless expenditure, reduce float at different government levels, and strengthen the government’s fiscal position.

Moreover, we expect the project to emerge as a blueprint for other infrastructure projects across India. We have already implemented the SPS for the Government of Odisha under the MUKTA urban wage employment program. The interim impact evaluation of the program has shown promising results. As these interventions stabilize, they can provide the necessary templates to explore convergence with other programs, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the National Skill Development Mission (NSKDM), and the 15th Finance Commission. Such convergence will improve the effectiveness of program delivery and bridge the manifest urban-rural divide in India.

Piloting smart payments for Odisha’s special schools

Posted on by Saumya Dixit

Transforming PFM through digital innovation

The government’s commitment to social schemes, particularly in education, is crucial for boosting citizens’ productivity and economic well-being. For instance, in India the year 2023-24 saw the sector receive its largest budget allocation of USD 15.5 billion (INR 1.20 lakh crore). Special grants for schools, linked to specific outcomes, exemplify this commitment. However, merely promising these grants is not enough to achieve the desired outcomes; effective fund flow and program management are essential. Digital solutions have emerged as a critical tool to enhance accountability and transparency. They can help modernize public finance and strengthen overall governance to safeguard the interests of taxpayers and beneficiaries alike. This blog, in our digital smart payments series, highlights technology’s reassuring effect to strengthen public finance management (PFM) systems in general and improve public expenditure’s efficiency in particular.

MSC seeks to solve challenges in the PFM landscape through the design of specific digital tools based on PFM principles of observability, single source of truth for data, digitization of inputs at source, and demonopolization of access to services. Once deployed, these tools will enable rule-based processing of payments and the “just-in-time” (JiT) release of funds. Thus, it would enable frictionless payment processing and real-time use of funds for any government program.

Case of fund management for special schools: The diagnosis

In early 2021, MSC worked with the Government of Odisha’s (SSEPDD) on public finance reforms under its digital PFM project. The department executes a grant-in-aid (GiA) program for schools that impart education to children with special needs. Under this program, SSEPDD provides funds to the schools under three major heads: (a) maintenance for residential and non-residential students; (b) salaries for teaching and non-teaching staff; and (c) other grants, which it receives in two tranches over a financial year. Under its GiA program, SSEPDD supports 6,815 students across 104 schools in Odisha with a total budgetary outlay of USD 5.9 million (INR 49 crore).

MSC assessed the program across special schools in four cities: Bhubaneswar, Bayalish Mouza, Nimapada, and Sunakhala. The diagnostic assessments covered the fund flow system, program processes, existing IT systems, and payment processing lifecycle. Some major challenges identified during the assessment are as follows:

  1. Friction in fund flows: The program faced issues related to delays in payments to vendors and teaching staff. As a result, the funds often remained unspent in the special schools’ bank accounts. Further, the Integrated Financial Management System (IFMS) could not track the expenditures incurred, and SSEPDD had limited visibility into the use of school funds. This was because the funds under GiA were disbursed from the state treasury to bank accounts of special schools that lie outside the government ecosystem.
  2. Poor visibility of staff attendance: The program lacked the provision to capture attendance on a single window portal (SWP) due to which schools had to manually record attendance data. This led to delays in the submission of staff absentee statement into the state’s human resource management system (HRMS).
  3. Poor vendor management: The lack of a vendor management module in the SWP led to manual systems to receive and approve invoices, record, and report expenditures, which led to delays in vendor payment processing.
  4. Administrative burden on officials: The program had a low monitoring capability across the payment lifecycle. It also had to release funds manually through biannual tranches. This made it difficult to trace the fund usage and increased the administrative burden on the District Social Security Officer (DSSO) and other officials.
  5. Lack of database integration: A lack of integration between different systems, such as HRMS and SWP, resulted in slow verification of important information.

From diagnosis to action

A solution was needed to enhance the functionality of SWP to support attendance tracking and vendor invoices. It was also necessary to streamline the fund flow from the treasury to schools and improve the monitoring capabilities of SSEPD. A smart payments system (SPS) provided such a fix. This new system would serve as an interface between the SWP and IFMS, which is Odisha’s IT-based financial management, budgeting, and accounting system. The SPS would consist of three components:

  1. Digital data capture system (DDCS): This system will create a digital layer on top of SWP and will have two sub-components:
    1. Digital attendance system (DAS) – to record the attendance of full-time staff serving as an input to calculate the monthly salary expenditures
    2. Digital invoicing system (DIS) – to generate digital invoices for non-salary expenditures, such as fees for part-time teaching staff, medical expenditures, and vendor payments for uniforms, groceries, fuel, and incidentals.
  1. Just-in-time (JiT) funding system: The JiT funding system will enable pull-based fund disbursement directly from the treasury into the school vendor’s bank accounts. It will assign virtual spending limits (similar to a credit card instead of actual fund transfer) as ‘authority-to-pay’ to schools, allowing them to pull funds in real-time as needed. The Finance Department has already built the JIT systemand integrated it with the IFMS. This system can allocate funds to respective DSSOs, who will then distribute it to the schools under their administration. It will also validate payment requests based on predefined conditions to disburse funds.
  2. Smart payments engine (SPE): It is a rule-based system that will integrate SWP and JiT systems. It will validate all payment conditions based on predefined rules as per the program guidelines to generate payment requests, send them to the IFMS, and disburse funds to the vendors and school staff.

MSC designed an SPS, that would enable the digital submission of monthly attendance records, generate vendor invoices, and expedite payment requests based on pre-approved rules and conditions. This way, it strengthens the current system SWP and IFMS. Refer to figure 1 below for an overview of the SPS.

Figure 1: Overview of the proposed smart payments system

At the process level, the solutions included digitization of all relevant documents, automation of procurement processes, digitization of inputs at source, and changes in the program workflows. Critical design elements that were considered while reengineering the process are as follows:

  1. Creation of a single source of data for the program: This sought to establish a single source of accurate information for all aspects of the program. It included special school details, staff assignments, vendor contracts, DSSO details, fund allocations, and payment records.
  2. Automatic payment processing: This was meant to ensure prompt and efficient fund disbursement to beneficiaries as per predefined processing rules. For instance, attendance details and staff absentee statements would be automatically submitted on each month’s last working day to facilitate salary payments. This will eliminate the time delays and reduce the administrative burdens on the school staff and SSEPD officials.
  3. Facilitation of machine-to-machine data exchange: This was intended to facilitate smooth data access across systems via defined protocols and integrated APIs. This step allows systems, such as the school’s SWP and the state’s HRMS and IFMS, to communicate effectively. It would enhance fund flow monitoring.
  4. Digital processing of program workflows: This sought to achieve digitization at the source. Function-specific IT solutions were developed, which included mobile apps for staff attendance, vendor onboarding, and digital invoice submission.

While JiT is already built and integrated with the IFMS, the progress on SWP enhancements is underway. MSC has proposed, developed, and deployed a robust SPS under MUKTA, Odisha’s urban wage employment program, in collaboration with partner organizations. We developed the SPS based on the lessons from the case of fund management for special schools. MSC has been working closely with the Government of Odisha’s Housing & Urban Development Department (H&UDD) and other stakeholders to implement a pilot on SPS in Odisha’s urban local bodies (ULBs). The initial results from the pilot have been promising – there is a complete elimination of float, with a 57% reduction in payment delays to beneficiaries, and a considerable reduction in the administrative burden on officials (reducing days taken for approval from 16 to 5 days, and eventually to 3 days.

A revolution in the PFM landscape through smart payments innovation

The smart payments solution streamlines payment processing, ensures fiscal prudence, and saves significant time and cost for the government once deployed, as highlighted by the results of the pilot. The SPS would facilitates observability, reduces administrative burden, and, most importantly, reduces friction in government fund transfers.

The smart solution could work in tandem with the government’s unique disability ID project to effectively manage programs for persons with disabilities based on the principle of a “single source of truth.” Over the medium term, we expect smart payments to become the cornerstone of the highly accountable and streamlined public fund management system.

 

Tracing a path for online selling for Women-Led Businesses in India

Posted on by Saumya Dixit

India has more than 63.39 million micro, small, and medium enterprises (MSMEs), which employ 111 million people and contribute 30.27% to the GDP. Yet these MSMEs face two related but significant challenges—access to capital and market. Market linkage as a support area is among the most ignored support areas in all entrepreneurship support programs. Our report talks about the unique challenges women entrepreneurs face and the way they navigate the marketplace’s digitization. Our analysis seeks to guide strategic decisions and policy development to enhance WLBs’ presence in the digital market.

Indigenous Financial Service research in Kenya, Ghana, and Togo

Posted on by The Helix Institute at MSC

This report delves into indigenous financial services (IFS) in Kenya, Ghana, and Togo. It highlights the pivotal role IFS play to advance financial inclusion for micro and small enterprises (MSEs). It emphasizes the distinct advantages IFS offers, such as enhanced accessibility, reduced costs, and fewer entry barriers compared to formal financial sectors.

Digital gender equality strives to connect half the world to the internet

Posted on by Saumya Dixit

Women-led development is one of the core focus areas of India’s G20 presidency. Since 2015, G20 has improved its focus on prioritizing and mainstreaming gender equality. The G20 Bali leader’s declaration mentions women ‘17’ times and ‘digital’ 33 times. It commits to putting gender equality at the core of G20 efforts for sustainable development. 

Digital gender equality can be achieved when women benefit equally from the possibilities and potential of the internet. India has put in place the building blocks to achieve this by creating a robust digital public infrastructure (DPI).  DPI created the foundation for open networks in MSME credit, universal health coverage, and e-commerce. 

More than 50% of women in the workforce are self-employed. E-commerce lowers barriers to entry for these entrepreneurs and enables greater market access. However, small sellers, the majority of whom are women-led businesses, find it hard to pay the heavy platform commissions and typically earn less on platforms. Finding ways to include them will not only lead to greater equality but will also boost the GDP.  India’s ONDC may bring this about by disrupting the e-commerce space to create a level playing field for smaller sellers. Onboarding more women sellers online and closing the gender gap in earnings on e-commerce platforms has multiple benefits. It brings more women sellers online, provides greater access to markets, and increases sales, incentivizing the entry of more women entrepreneurs.

Similarly, the Women’s Entrepreneurship Platform (WEP) of Niti Aayog is another example of a DPG addressing information and networking needs of women entrepreneurs. 

Government eMarketplace (GeM) which facilitates public procurement of goods and services for government entities, has set a target of 3% procurement from women entrepreneurs. Reportedly, 1.44 lakh micro, small women enterprises have fulfilled orders worth Rs 21,265 crore in gross merchandise value (GMV).

In a world where access to resources is increasingly mediated by technology, inclusive digital Innovation has a key role to play. When deliberately designed to be equitable, innovation creates a vital pathway for gender equality. Focus on gender-inclusive digital innovation becomes even more critical in the face of the enormous gender digital divide.  

There is ample evidence that a widening gender digital divide risks women being left behind. Over 30 years after the internet was born, one-third of the world’s population remains offline. Many among the online population, especially women and girls, are not “meaningfully connected” because of a lack of access to devices or connectivity that is unreliable, slow, or costly connectivity; or lack of digital skills needed to get the most out of devices and services. 

​The digital gender gap is also costly. Estimates suggest that countries have missed out on USD 1 trillion in GDP due to women’s exclusion from the digital world. 

One lesson the previous industrial revolutions can teach us about the 4th Industrial Revolution is that if old jobs are destroyed, new jobs are created where there are capital and innovation capabilities. The emerging economies of G20 have demonstrated the latter significantly. India’s DPI starting to facilitate women entrepreneurs through various digital public goods like ONDC and GeM is the best example of this. 

As India convenes the third G20 Ministerial Conference on Women’s Empowerment this year, it’s time to show what global solidarity could do to close the gender digital divide. Only bold commitments translated into concrete actions will ensure that half of the G20 population is not left behind in the rapidly digitalizing global economy. 

The article was first published in The Economic Times on 30th April 2023.