Aasha

Welcome to Life Beyond Tax! Today, we track India on the progress of becoming near cashless society that has two distinct advantages. Firstly, it digitigrades the problem of fake currency notes and black money. Although we have miles to go but the preparation from the root's up will pave the way for a digital integrated society.

Today we have with us Mr Krishnan Dharmarajan, who is an engineering, management and strategy wizard, who understands the method to develop and scale innovations. His agenda is to empower the poor and low income groups through the direct delivery of financial benefits like subsidies for the poor; financial assistance for the students; support for the farmers; small credit for business and even health related payments. Mr Krishnan, an Executive Director of the Centre for Digital Finance Inclusion, a private institution which was set up in the last year for design, development and delivery and scaling of innovative financial product, and to be implemented in the areas of health, education and agriculture. The institution helps to have a huge impact on the lives of the underserved Indians. Before turning an 'Avatar', Mr Krishanan was a Commissioner in the Directorate of Systems with the Central Board of Excise and Customs. He has also played a crucial role in the design and development of the GST network and even conceptualized the idea of nationalized e-governance for the Government of India. In this remarkable journey he has won a number of awards for his innovative work and one of them being the development of a mobile banking framework for a bank. Let's meet Mr Krishnan Dharmarajan!

Ashaa

Mr Krishnan, you have been quite a rolling stone; as you have moved from e-governance to GST for innovation in the various departments of Government of India. What have been your most memorable moments with the government?

Krishnan Dharmarajan

When you say rolling stone, it probably starts from the time when I was an engineer and actually developed an interpreter for a language (coding for an artificial intelligence systems) which was a part of my final year project. I wrote an interpreter for that language; the language can be used to design cognitive models and system. So from then the movement to the government has been specified and interestingly, the government has given me lot of opportunities to do this. It gives you very complex problems to deal with and also gives a sense of scale. Here anything you do immediately impacts the million, so the idea of innovating in scale is that something comes naturally. Now coming back to the interesting things in the government are quite a few right from the initial days in our department CBEC. The CBEC was the pioneer in putting out systems where electronically one could file documents in the year back 1995/1996. Today people talk about e-governance but CBEC was doing e-governance before the term was being banned in the officially and it was named as e-filling at that time. But what was done in twenty years back by CBEC, even now some governments are still trying to catch up the same by agreeing the fact that how advance we were then. I had opportunity to do different kinds of innovation; one was like at the organization level creating an organization body which can be an apex body for e-governance to look across all sectors like income tax, municipality etc. It was a challenge as how can we create an organizational structure that can over-see and support the entire program at a national level. And the second interesting thing we did among the many others was: How can we use the mobile phone as a device to reach out the basic financial services to the poor people i.e., transfer of money, deposit money in bank or withdrawal of cash. We actually work for a frame work like how we can take banking to the non-banked country and it was accepted by the government as a whole. And when we were to develop that frame work it was in coordination with RBI, TRAI, various ministries and bringing the Home Ministries at the security level and of course the coordination of the IT department, and I was anchoring the entire process across the departments.

Aasha

What did this application enable?

Krishanan Dharmarajan

In a rural area the application would enable a person to do transaction through bank account by just using a simple mobile likewise; transferring of funds, putting money in bank account or withdrawal off cash by a poor man.

Aasha

Does one would actually go to the bank for delivering the money?

Krishnan Dharmarajan

Not the bank, infact there was a concept of ‘Business Correspondence' which means that the bank operates through business correspondence across the country in rural areas. So it was actually like a retail agent and till then there was regulatory constraint for not only profit companies or for retired teachers that could become business correspondence. We allowed any private company to become business correspondence which effectively meant that all the telecom companies and FMCG outlets which have large retail networks; they could tie up with banks and become business correspondence of banks. So at one stroke you had increased the reach of banking sector through other retail channels to reach the poor. This was an effective kind of a tool on which we worked out the model, regulatory constraints, security issues and all of that was done systematically and was brought out in 2010. I must say that it was a phase of reform of how you could use mobile to reach.

Now the upcoming second phase is that what the government has allowed or the RBI has allowed a new concept of ‘Payment Banks' in a sense that we can have 11 new licensees which can set up banks that would do everything except credit. So it can accept money, it can give interest on the money, it can facilitate remittances, facilitate payments except for loans. Many big companies and service providers have made ‘Payment Banks'. So this is the next big revolution that is going to hit. A large number of people are observing this sector with great interest because this could be a game-changer because at the same time you can leverage this network and use the technology effectively. Technology and financial inclusion are closely linked and the only way you can make financial inclusion happen is through technology.

Aasha

Sir, in a way the Prime Minister's Jan Dhan Yojana has enabled the use of mobile application for the fact that most of the people have bank accounts and these accounts would leverage to the next level.

Krishnan Dharmarajan

Absolutely, they have bank accounts that can be leveraged but these new ‘Payment Banks' can also open new account if required. We are recently working on setting up of Goods and Services Tax (GST) as a company. In the pilot project of GST, we coordinated across all the states and the Centre to demonstrate that it is possible by involving selected companies to participate in the pilot. Also in an organizational sense if a private company is managing tax then it would be a new thing. From the years of experience one would know that the government has inherent limitations in doing technology driven project, so the flexibility in private company can allow talents to do it. It is not about money but if people somehow seems to think that one can throw crores and project will come to happen then it's a foolish idea. The other innovation is that we had 49% stake for the government and it was distributed between the Centre and the States so that every state has stake in the company. So it's like an entity which collectively implements a project across the Centre and the States with having shareholders holding the company and keeps it private. So it's a pretty unique entity, perhaps the another exciting thing one does before entering the Government.

Aasha

What brought you to digital financial inclusion?

Krishnan Dharmrahjan

There is no subject area that has brought me into digital financial inclusion. It is more of the approach one can take to the developing new ideas, working with multiple stake holders and excites to make big projects happen.

Aasha

What are the new ideas and innovations that you are working on for Digital Financial Inclusion?

Krishnan Dharmrajan

At Present, I am working for Centre Financial Inclusion where we look at how to leverage the technology reach financial services more on the line for what I have done earlier. Several interesting things we look at different kind of themes, so one of the themes we are looking for is to 'how we can promote cashless transactions'. For this we analyzed and also did researched that if cash is an area where there is a huge expense incurred by all agencies, there is transaction cost when you are transacting cash . For the perspective of the financial inclusion, cashless is very important because today to convert ones deposit in a bank into cash, for this we have to go to ATM and withdraw money and ATM transaction cost something around Rs17 per transaction. We are allowed 5 free transactions in a month that comes to Rs100 per person. Hence it cost a lot of money, except that it is not visible to us because its being subsidise under the regime. The same regime is not subsidise the cash withdrawal's for the poor villager where one is going and drawing money under the whole ‘Rural Employment Guarantee Programme‘ or under ‘Janani Suraksha Yojna'‘ where mother is drawing money after pregnancy what the government is giving, it's not subsidise. So the subsidy should be flowing in the right place. You are actually subsidizing the rich but for withdrawls or transactions not for the real section of population which need the the subsid are not sufficient and therefore there is no business model as development .So actually making this 10 cr or 17 cr Jan Dhan Account & all these people doing and drawing money it's not going to be viable.so you have to create a cashless eco system at the village level & also the semi urban or even this segment of the population today which is not used to that cashless. Interestingly, the government as issued those Jan Dhan Cards which makes it possible .many of them has mobiles today. Mobile connectivity is very high even in rural areas. So you have devices for them to engage in cash less, so how do you now create this eco system there, so that those accounts will start entertaining & start using cashless transactions. Otherwise as soon as you put money into account which belongs to poor man he is going to with draw all the money and go, because for him it is 20 km or 10 km travel to a bank & if that is the way bank account going to operate the banks are not going to make any amount out of it. It will not work. So the money has to stay there & people have to do all their transactions cashless. So, how do you promote cashless system? One of the researches we were doing is how do you create a sustainable or low cost cashless model aroundSmall Kirana store & Hawkers. I mean you should be able to do cashless transaction even if you are buying from street hawker.

Aasha

So it's like a bank account card need to be accepted by Kirana stores.

Krishnan Dhramrajan

Yes. So, how do you create an acceptance infrastructure at a rural level for these kinds of users? And what is the model that is created to bring down the cost of a transaction for such cashless & can we tie up those cashless transactions with credit those small shops. Today a small shop doesn't credit a very high price, so can we use as a vehicle to credit on small shops also. So there is win- win for everybody in creating this eco system. So we are working on a model. We have collaborative research project with IIM Bangalore. Simultaneously we are also looking at some policy level, be it some research, you come out with some suggestion that if you actually give income tax rebate for above certain percentage transactions being done cashless it can actually change the entire behavior of people. So if today you walk to a shop and he says that I would not accept the card you please go to the ATM and draw money. So there is no incentive for you to use cashless. There is disincentive for shopkeeper to accept the cashless because there is tax implication, there is 1.5 percent charge which he has to pay, vat for transaction, but you have no incentive to go to him or go to the next shop where he is accepting cashless, so we are trying to say if we have threshold more than 85percent, 90 percent of expenditure you do transactions cashless which can be easily evidence from your bank statement & then in the end of the year you could probably get back 5 percent tax liability. So if government can induce such system, the simple incentive will kind of completely change behavior. It will create a demand for cashless transactions across the country, it will encourage more shops to go to cashless otherwise they will lose customers and it will actually dries out the cost also. So by one single stroke of policy we worked out the numbers which actually shown that government will make money out of this .But bigger impact is you cleaning up the entire economy because all these are going to be tax-free transaction , they are going to be account to account transactions & little difficult to move black money . So by the single stroke, by giving this rebate encourage a whole lot of people to go cash less. A lot of people today are honest tax payers. The entire middle class is honest tax payers, there is no incentive government give on honesty, of course there is penalty on dishonesty. So if you actually give as benefit of honest people he would feel into cashless so the avenues actually on black money will go down because there is much wider pipe of white transactions across the country which will work. If you look at purchases made in shops, and shopkeeper who does this cannot hide VAT, he has to pay VAT, tomorrow in GST regime we need to track invoices because of whole GST framework is invoicing & taxing, taxation based on invoices. So for GST it's very important that we have invoice driven transactions & this is going to be direct facility to that , as soon as we do this you have given fill up to entire GST framework . So there is win -win around this.

Aasha

But the honest incentive would have to be higher than the tax paid out on open transparent transaction.

Krishnan Dharmraja

Yes, it is because the tax rebate should be able to offset positivity so that what we have calculated and shown. This is an example of a kind of innovation policy or research driven innovation we are doing at a kind of policy and programme level also. So this is one of the ideas that we are working on.

Aasha

Is there any interesting scheme or innovation that you are working on at the moment? Or something which have been a change of approach considering the situation on the ground of difference from what you have anticipated.

Krishnan Dharmrajan

These things are there and another interesting thing now we are working is that we trying to develop the concept with the government of Kerala where they give lottery for people who buy goods, in shopping festival against a VAT receipt. So they ensuring that people are paying VAT & it is like lottery type, so it's very interesting idea running in Kerala .So we said can we overlay a cashless scheme on that. And we are trying to have digital shopping festival in addition to this. If you do cashless transaction you will be given a digital lottery ticket over the mobile.

Aasha

Lets hope we can reduce the gap between the have and the have-nots through digital financial inclusion. We wish you all the best.

Krishnan Dharmrajan

Thank you so much !