Fund-flow reforms for improved social program delivery in India

Central and State governments in India have adopted a financial reform to enhance public service delivery informed by evidence

With close to 50 million beneficiary households in 2013, the MGNREGS is the largest social protection program in the world today (Cornfield | Shutterstock.com)

India’s largest social protection program, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), guarantees households 100 days of work per year, typically in unskilled manual labor on infrastructure projects. For MGNREGS, the central government disburses funds to local governments based on projected spending, a system that has extensive delays and leakages. In Bihar, J-PAL affiliates tested the impact of an information technology reform that linked the flow of funds to actual expenditures and reduced the number of officials involved in the process. The reform led to a 24 percent decline in expenditure without a detectable decline in employment or assets created, and there is direct evidence that at least part of the decline was due to reduction in fund leakage.

The Policy Influence: Informed by the results of the randomized evaluation, India’s Union Cabinet approved a national reform of MGNREGS fund-flow.

The reform allows beneficiary payments across all Indian states to be made through a newly-established National Electronic Fund Management System (Ne-FMS). As detailed below, in the Bihar study MGNREGS funds flowed directly from a state government account to village councils (called panchayats), which in turn then paid the beneficiaries. Ne-FMS streamlines fund-flow further by transferring money directly from the central government to the beneficiary’s bank account. The Cabinet note cites J-PAL’s evaluation as part of the rationale for this decision – highlighting the reduced leakage and improved service delivery generated through fund-flow reforms. Over the last year, 21 states have adopted the Ne-FMS for making MGNREGS wage payments. The Bihar evaluation is also shaping the government discourse on improving fund-flow for other government programs.

The Problem: Government social programs in India are plagued by public service delivery failures, which hinder program performance and adversely affect beneficiary experience.

MGNREGS funds are disbursed to local governments based on projected spending amounts, justified ex-post, rather than on the basis of actual expenditure. This fund-flow system creates opportunities for corruption, because it creates a long gap between the receipt of fund and the documentation of its use, which adversely affects the quality of audits. Multiple layers of approval, introduced to increase accountability, are not necessarily effective.  A recent nationwide study estimated that at least 20 percent of official MGNREGS employment is not accounted for in household surveys.1 In addition, multiple levels of approvals lead to funding being delayed or blocked at various levels of administration, and the advance payment system results in funds that sit idle and unutilized in some places, while other places may not have sufficient funds to run the program.

The Research: A fund-flow reform in Bihar reduced corruption and improved program efficiency

J-PAL affiliates Abhijit Banerjee (MIT), Esther Duflo (MIT), Clément Imbert (Warwick), and Rohini Pande (Evidence for Policy Design, Harvard) together with Santhosh Mathew (Government of India) worked with the Bihar Department of Rural Development to evaluate the impact of e-governance reform of the MGNREGS cash flow on corruption and overall program performance. The evaluation, conducted between September 2012 and March 2013, spanned twelve districts in Bihar, covering a rural population of 33 million. In each district, 69 blocks were randomly selected to implement the new fund-flow system and the remaining 126 comparison blocks kept the status quo.  The field work was conducted by J-PAL South Asia at funded through the International Growth Centre (IGC) and International Initiative for Impact Evaluation (3ie).

The e-governance reform enhanced transparency by linking the flow of funds to actual expenditures and it also reduced the number of officials involved in the process. Specifically, the reform required village-level officials to input the names of beneficiaries who had worked in the scheme and were owed wages into an online database. Submitting this information automatically released funds into the village council bank account. These changes were intended to reduce opportunities for leakage and eliminate “parked funds” at the district and village council level.

After a year under the new system, the evaluation found significant impacts along two key dimensions:

  • Reduction in corruption: Program expenditure fell by 24 percent without a corresponding change in program participation, suggesting a significant reduction in leakages. There is also direct evidence of a reduction in leakage: The number of ghost workers went down by at least 5 percent, and the median self-reported wealth of government officials involved in the program went down by 14 percent.
  • More efficient fund distribution: The electronic transfer system reduced the amount of parked funds held in treatment village accounts, reducing the financial costs of implementing MGNREGS. Average bank balances for treatment villages councils were 33 percent lower than comparison village councils.

For more details, see the evaluation summary.

“Studies on the effectiveness of the electronic flows in Bihar done by eminent economists (Abhijit Banerjee and others, Dec 2014) showed that e-governance based fund-flows reduced leakages by about 25% and improved service delivery." Cabinet Note, Government of India

From Research to Action: Influenced by the Bihar study, the Government of India asked all states to shift to a similar fund-flow system for MGNREGS wage payments.

Co-author Santhosh Mathew, an Indian Administrative Services officer, moved from Bihar to a senior post in the Government of India’s Ministry of Rural Development in 2013, marking an opportunity to leverage learning from the study nationwide. He collaborated with J-PAL affiliates to share the research results and emerging policy insights with key central government ministries. The J-PAL South Asia regional office supported these research translation efforts through a grant from the J-PAL Government Partnership Initiative.

The research and policy outreach informed the Union Cabinet’s approval for a national reform of the MGNREGS’s fund-flow in August 2015, citing J-PAL’s work. The reform allowed beneficiary payments across all Indian states to flow through the National Electronic Fund Management System. To date, 21 states have adopted the new financial system for making MGNREGS wage payments directly to beneficiaries.

In addition, the study’s results have influenced the broader discourse on fund-flow in government spending. For example, the 2015-16 Economic Survey (the Ministry of Finance’s annual review of the economy) cited the study when advocating for large-scale, technology-enabled and real-time direct benefit transfers in the delivery of government programs. In 2016, the Ministry of Finance extended the use of the Public Financial Management System which integrates expenditure-based fund-flow systems from the Bihar study into all centrally funded government programs.

References

Banerjee, Abhijit, Esther Duflo, Clément Imbert, Santhosh Mathew, and Rohini Pande. “E-governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India.” NBER Working Paper No 22803, November 2016.

Imbert, Clément and John Papp. 2015. "Labor Market Effects of Social Programs: Evidence from India's Employment Guarantee." American Economic Journal: Applied Economics, 7(2): 233-63.

Government of India, Cabinet Note No. K/11011/02/2008-NREGA-I

1Imbert, Clément and John Papp. 2015. "Labor Market Effects of Social Programs: Evidence from India's Employment Guarantee." American Economic Journal: Applied Economics, 7(2): 233-63.