This reminds me of this crazy Korean animated film called aachi and ssipak where the government payed people in addictive candies for their waste, which it used to produce electricity.
Like that film I would imagine the incentives would have unintended side effects, like encouraging more manual scavenging. I think the money is better spent on infrastructure and public outreach. The problem doesn't seem as much that people want to relieve themselves outside, but that it is the best option available to them right now.
The free market works well generally, why not here? To try to reverse generations of social tradition where only "lower" people are involved with waste, the govt. should really pay high rates for waste, which would work to reverse this tradition by elevating the social status of the workers involved.
You miss the point in any case. By paying for waste delivered (and perhaps tokens to minimize fraud), you would create a cottage industry of portable toilets, and solve the problem with one simple policy.
Another incentive based strategy would be to make cash bonuses to local officials based on the fraction of residents in their district actually used toilets. This could be measured by randomized surveys and spot checks.
All problems can be improved with properly designed financial incentives.
It might not be a bad idea for the Indian government to start with open defecation toilets that collect raw sewerage for processing. A large part of the problem in slums is the issue of safety in confined units like public toilets.
Like that film I would imagine the incentives would have unintended side effects, like encouraging more manual scavenging. I think the money is better spent on infrastructure and public outreach. The problem doesn't seem as much that people want to relieve themselves outside, but that it is the best option available to them right now.