Tuesday 21 August 2018

Re-energising the India Post model [Article about Department of Posts]

The strengths of India Post must be leveraged to make it financially viable

In a world where communication has assumed different forms with the written word being transmitted on mobile phones and the proliferation of private courier services for printed matter or documents, the role of India Post needs to be redefined. The starting of the payments bank is pragmatic because the department may have just taken the right step at a time when postal services have become less relevant while financial services continue to be important given their under penetration in rural areas.

To get a better sense of how the postal business has traversed over time, we must look at the last 10 years ending 2016-17. Table 1 juxtaposes some broad numbers taken from the Statistical Handbook of India and Annual Report of the Postal Department.

Today, the viability of any organisation is determined by the break-even numbers. Here it is clear that the deficit or loss made has increased sharply over the last decade. The table also indicates that over the last 10 years the importance of the Postal Department has declined and the government is aware of this.

The fact that the number of post offices has come down as have the employees on the rolls appears to be in line with the declining volume of business, which has come down by around 7 per cent. The handling of the savings pie has on the other hand increased which consists of small savings that is contributed more by the middle and lower income groups with a strong rural bias.
However, here too the compound growth rate of around 6.8 per cent is much lower than bank deposits which have grown at almost double the rate. Hence this section remains niche.

Also the losses of the department have increased by over nine times. The department has been run as an essential service which is primarily used by the weaker sections especially in the rural areas. This can be seen by the domination of the rural sector in total post offices and was 1,39,067 in 2016-17.

Postage rates

As a result it becomes very difficult for the government to increase the postage rate given that it is uniform across the country. Consequently, while trying to address the communication needs of the lowest income group, the higher income groups too end up enjoying this benefit.

With this goal in mind the department has been subsidising the cost of operations to a very large extent as seen by the losses being incurred on virtually every activity.

The only service which gets in a positive net income or surplus is insurance. A thought here is that the government should reconsider some of the services in the light of their relevance. Can money orders be replaced by mobile transfers? If private couriers have replaced India Post for some of the services, can the same be truncated? Can the small savings activity be hived off to the Payments Bank?

Interestingly, the volume of business has fallen across all segments which the accompanying table shows. The losses have been mounting as several costs like administration, maintenance, salary, etc. move with inflation while transportation costs keep moving up more than proportionately. Therefore with the volume of each business coming down, these fixed costs increase the cost per unit of business.

It is generally believed that visits to the post office come down when there are alternatives available. However, when the communication is from or to government departments across the country there is a mandatory use of postal services. This holds for all job applications and submission of documents and hence in a way is a cross subsidy which will get reflected in some savings in other departments as the cost would be higher if private services were used.

Also given the reach of the Postal Department, it is not possible for private services to reach the rural areas and even in case they do, there are time issues of delivery. The Postal Department delivers the best. Notwithstanding these advantages, the fact that technology and private services are catching up in a big way the threat of loss of business to Whatsapp and courier services is real.

The government has been working hard to make various departments function in a more effective manner. It is only a matter of time before the India Post comes under active review. The creation of the India Post Payments Bank is a good step and though the progress of these banks has been slow, there is scope for this venture to succeed given its reach.

But there are reforms which can be implemented for the other services.

Revamp pricing

First, the pricing structure has to be revamped as such heavy losses cannot be sustained. Differential pricing based on location can be considered with the rural areas getting a subsidy. The other centres would have to be made to pay the full cost. Hence an inland letter can be priced at ₹4 if sent from a rural post office and ₹10 from others.

Second, post office spaces should be leveraged to earn rent. As financial inclusion includes also non-banking products, these can be sold in post offices by the mutual funds or their agents.

Third, the existing staff can be trained to sell financial products like insurance and mutual funds in rural areas and a commission earned by the department.

Fourth, the post offices can be integrated with the eNAM initiative where terminals can be kept in these offices for use by farmers. Further, dak sewaks can be used to also form a link with the agricultural markets (eNAM) as they have direct interface with farmers and can be given the responsibility of spreading awareness as well as be the link with the market prices.

There is considerable scope to leverage the present strengths of India Post to not just make it financially sustainable but also maximise the utilisation of the infrastructure to link it with other goals of the government to create a virtuous cycle.


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