The digitization of the public finance architecture is the need of the moment
Prime Minister Narendra Modi, in his recent Independence Day speech, explained how India’s development aspirations were affected by poor public service delivery.
The poor delivery of public services in India has upset academics and practitioners for decades. The state has immense capacity to run large and complex undertakings such as national elections or the deployment of systemic changes such as the Goods and Services Tax (GST) regime or the United Payment Interface (UPI) .
Connectivity and road quality have improved dramatically thanks to flagship programs such as PM Gram Sadak Yojana. Yet primary health care centers in rural areas or even the poorest in urban areas remain under-equipped.
UNICEF says insufficient water, sanitation and hygiene (WASH) services in health facilities nationwide contribute to high newborn rate of 24 per 1,000 live births, with sepsis contributing to 11% of maternal deaths. Public schools, which are critically understaffed in the hinterland, often lack access to electricity, toilets and basic infrastructure, which has a negative impact on children’s learning outcomes.
India has undoubtedly made huge strides in economic prosperity. However, there is still work to be done.
In this regard, the government must focus in the short term on managing its spending at a time of considerable fiscal pressure. The short-term challenge is to get the most out of every welfare dollar spent while still enabling effective and efficient service delivery on the last mile.
Public Financial Management (PFM) is a major fulcrum that will determine whether the aspirations of all Indians can be met in the coming years.
Identify the challenges
PFM relates to a government’s ability to collect revenue, allocate and execute budgets, and monitor the flow of funds to citizens, private entrepreneurs and between different administrative levels and departments. Timely payments, in particular, are essential for service delivery. It is an important incentive for private companies to participate in government projects or for individuals to invest their confidence in the ability of an elected official to get things done.
Current fund flow systems are characterized by high administrative burden (administrative papers), low liability (denial of liability) and expenditure frictions (multiple levels of approval). This manifests itself in the fact that the beneficiaries do not receive their due rights on time or that the contract workers are not paid for months. It also means that government officials spend more time dealing with paperwork than ensuring proper implementation of programs.
Offline payment / project approvals, indefinite payment delays, and confusing project cost overruns are normal.
The government has tried to move in this direction, but the digital “solution” is sporadic. Autonomous systems across departments dominate. Data is entered manually at different stages and the databases are not organically linked. Civil servants and departments work in silos. Often times, technology has been used to simply digitize existing processes instead of being leveraged to make processes more streamlined and agile.
The current PFM architecture poses three specific challenges.
First, manual data entry – for payment or plan details, as the case may be – often makes information unreliable or of questionable integrity. Manual data entry also increases administrative burden and slows down payments.
Second, transaction chains are often not found and information is hidden, mainly due to misclassification.
Third, creating a repository – a “single source of truth” (SSOT) – where data is aggregated in one place remains a problem. An SSOT would facilitate access to several user departments to improve targeting of beneficiaries or monitoring of the scheme. The Estonian “X-Road” is an example of this which guarantees safety and interoperability.
Efficient systems, efficient development
A transformative change in financial governance is therefore necessary. A robust PFM system using an ever growing range of digital tools is the solution. The digitization of the public finance architecture can solve some or all of the challenges highlighted.
Such solutions integrated into government payment systems will increase accountability, reduce administrative burden, make payment processes more efficient, and ensure more efficient social assistance delivery. The experience of the GST Network portal (GSTN) is remarkable. After the first setbacks, it was “redesigned” to facilitate tax reporting while ensuring transparency.
He facilitated trust, reliability, interoperability, simplified compliance through automated invoice matching, and was tasked with verifying the escape. The UPI, likewise, has made it easier to enter digital payments. While policy changes, particularly the non-imposition of transaction fees, have helped the UPI take off, the robustness of the ecosystem and the confidence it has generated has seen volume and value. transactions have tripled since March 2020.
Similar solutions can also be explored in current government PFM systems. Implementing a smart payment system that would speed up payments, minimize discretionary approvals, and improve overall observability by making decision making traceable can be a good start.
Intelligent payment systems driven by if-then-else rule-based algorithms can automate payment workflows and minimize manual data entry. This algorithmic “engine” will determine whether predefined compliance requirements are met. Each positive result is followed by a similar process in the subsequent steps of automatically calculating entitlements and making payments. The necessary controls and deadlines are defined for each step. Data is captured and can be exchanged seamlessly throughout the process.
The changes required are not huge. Documents such as invoices, Certificates of Use (UC), detailed project reports, etc. must be machine-readable and uploaded to a single platform integrated with existing government platforms such as the PFMS.
Smart payment systems will benefit providers and citizens by allowing them to view payment statuses in real time and helping them resolve complaints faster. For the individual bureaucrat, they would help provide greater observability of a scheme or payment. They would have time to focus more on delivering quality of service than approving payments without any visibility into downstream activities.
Finally, adopting principles such as just-in-time (JIT) funding would reduce inactive float in departmental accounts. JIT means that there is no early release of funds, a significant amount of which is often found in departmental bank accounts for years. Estimates put the unused float at over 1,000 billion yen. The CEE can reduce this fluctuation and therefore reduce the public deficit. In the end, the money only comes out of the Consolidated Fund of India or the States when payment is due.
Willingness to change
The government is already moving in the right direction. For example, all financial payments and general information of beneficiaries and vendors participating in Mahatma Gandhi’s National Rural Employment Guarantee Act (MGNREGA) are now managed through a workflow system. The monitoring of the state of road construction and the recording of payment information under the PMGSY is carried out through the Online Management, Tracking and Accounting System (OMMAS). However, the multi-step data entry remains manual, sometimes making the data unreliable. Smart payment systems can help overcome this challenge.
So, to begin with, there are three things the government can do. First, by enforcing a single source of data, linking data systems and using that data for payment decisions, not just reporting. Second, by using smart or algorithmic payments which will reduce the discretion to pay. Third, release funds only when needed, i.e. release JIT funds.
Institutional interventions of this magnitude require the support of the Indian political class and bureaucrats. The means exist provided that the objective is indeed good governance and a global impact on development.
Thapliyal is a partner and leads the Digital Financial Services-Government Social Impact (GSI) practice at MicroSave Consulting (MSC), and Basu is Manager in the GSI practice at MSC.