Using digital technologies to reduce inequality within and among countries

United Nations Sustainable Development Goal 10 aims to reduce inequality both in and between countries. Unicef highlights fundamental issues of poverty: “inequality starts with the lottery of birth – who your parents are and where you are born – that accounts for variation in the resources and opportunities available to people.

The social and economic inequalities and disadvantages in early life can limit opportunities for the realization of one’s rights and the ability to realize one’s full potential. Discrimination based on age, gender, ethnic or racial group, disability status, sexual orientation, migratory status, residence or other factors serve to disadvantage some individuals in many different and often invisible ways, throughout their lives. These patterns of inequality get passed on from generation to generation. Therefore, early interventions and investing in all children, especially the poorest and most marginalized, is central to breaking intergenerational poverty and inequality” (Unicef, n.d.).

Despite steady economic growth, poverty remains a serious issue in India. Almost 70% of the population lives on less than USD$2 a day (SOS Children’s Villages, 2018). The gap between poor and what the World Bank terms ‘non-poor’ has a significant impact on health and wellbeing – only a fifth of Indians live in houses with a toilet plumbed into sewage infrastructure – and the cyclical poverty referred to by Unicef above – few Indians have running water in their homes and around 40% lack electricity (World Bank, 2016).

In 2013, the government of India launched a Direct Benefit Transfer (DBT) scheme aimed at reducing poverty in the country.

What is a Direct Benefit Transfer (DBT) scheme

The technology used in this case is a set of software solutions designed to deliver money quickly and efficiently. The DBT system works with a Beneficiary Account Validation System which is integrated with local and national banks public and private banks.

How DBT works

Traditional payments systems to citizens often feature ‘leaks’ – commissions and other payments to intermediaries – which are inefficient from a poverty alleviation perspective. By using the DBT system to transfer money directly to individuals’ accounts, the scheme ensures that all of the intended funds reach the intended individuals and that the money clears and can be used quickly as required. Individuals apply for an Aadhaar (an ID number) from the Unique Identification Authority of India. Once validated by the Beneficiary Account Validation system and approved for eligibility. Approved applications trigger payments to the beneficiary’s account and reconciliation through a centralized Aadhaar Payment Bridge system, which routes payments to the destination bank (National Informatics Centre, 2022).

Benefits of DBT

The system has been so successful that the International Monetary Fund’s (IMF) Director of Fiscal Affairs recently described the Direct Benefit Transfer scheme as “a logistical marvel”, commenting that, “From India, there is a lot to learn. There is a lot to learn from some other examples around the world. We have examples from pretty much every continent and every level of income. If I look at the case of India, it is actually quite impressive” (Business Today, 2022).

The system has enabled direct transfers of money from the state to the poorest people in society – a particularly impressive achievement given the geographical size and population of the country. Hundreds of millions of recipients have received funds through DBT. In particular, the system pre-existing the coronavirus outbreak in 2020 enabled the Indian government to pay individuals even through periods of time when physical payments and other, more traditional methods of poverty alleviation became extremely difficult.

Costs of adopting the system

Assessing the costs of the entire DBT system is difficult because of the many sub-systems included in the DBT programme, some of which used existing infrastructure. However, the main expenditure in the system is the transfer of funds to beneficiaries. Between the programme’s initiation in 2013 and 2021, the last full year for which data are available, the state transferred the equivalent of USD$260 billion (Direct Benefit Transfer, 2022).

Lessons for other organisations

The main lesson that can be learned from India’s DBT system is that poverty reduction through direct, ambitious programmes is possible even in a country in which there are stark regional differences in language and culture, and where the size and population of the country might seem prohibitive to such solutions. Discussions of universal basic income (UBI, see further reading below) have grown in recent years and India’s now decade old solution has demonstrated an efficient mechanism for the dispersal of funds to some of the country’s most vulnerable people. In the 1980s, Indian Prime Minister Rajiv Gandhi stated that only 15% of funds directed to the nation’s poor reached their targets. The current government claims that the figure is now 100% (The Economic Times, 2019).

There are, as ever, barriers and challenges to the introduction of such a system, however. First, individuals require access to bank accounts. The World Bank estimates that up to 2.5 billion people worldwide do not have access to such facilities, an issue which has itself become the focus of poverty alleviation programmes (The Borgen Project, 2016). Second, populations with no history of banking systems require education on the use of bank accounts both from a purely functional perspective and also in terms of trust in such a system and on potential issues with security in terms of personal details. Third, the system requires a degree of centralization and coordination among national and regional government departments which can be hard to achieve even in small, highly developed economies which already have the infrastructure which might support such integration. Finally, such a system cannot simply be rolled out and left to run – it requires monitoring for the benefits of the payments and to ensure that inflation doesn’t gradually erode the value delivered to beneficiaries.

Further reading

If you would like to know more about universal basic income, check out this explanation from the International Monetary Fund: What is universal basic income?