Enabling Financial Inclusion and Greater Access to the Economy

India has emerged as a leading nation for using technological advancements to foster economic growth, increase productivity, and create a safe space for a burgeoning digital economy.

By Mpho Majoro
625 Views / Published Aug 18, 2024
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‘The country has built a digital public infrastructure (DPI) that includes a digital identification layer called Aadhar; a payments system running as a unified payment interface; and a data exchange layer in its account aggregator, among other services.’ – The World Bank

The internet has radically transformed the modern world, making it possible for societies to create digital spaces, networks and systems of innovation and development, as well as new economies. India is using technology to foster economic growth, increase productivity, and aid the burgeoning digital economy. Through a public-private partnership, the South Asian nation has set up digital public infrastructure, also known as DPI, to bolster the country’s socio-economic development.

The fundamental principle behind India’s DPI is to build digital platforms as a public good and create an environment for collaboration between the public and private sectors. The premise of digital public infrastructure is no different to the foundational building blocks of modern societies such as rail and roads – they can be harnessed to foster innovation and competition, expand markets and close gaps in financial inclusion. DPI is a platform that allows future digital growth and advancement through a system of stacking. India Stack, as DPI is commonly referred to, is an interoperable platform that deploys smart technologies, which allow programmes to be layered on top of each other.

The layering, or stacking, of the system starts with the physical infrastructure in the form of servers, devices, routers, and many others. These are supported by a solid bandwidth that allows stable and secured connectivity. The information solutions consist of apps that enable various socio-economic activities. The services offered on DPI spaces range from money transfers to health facilities and a plethora of others, at a massive scale – and there are no limits to what the infrastructure allows for.

This radical transformation of India’s digital space has come about largely due to decisive, solid, and progressive policy frameworks. The Indian government has been instrumental in the development of the DPI, offering the necessary support to its private partners, who are the main drivers of India Stack. One such partner is the Open Network for Digital Commerce, or ONDC, a private non-profit company set up in 2021 to develop open e-commerce. ONDC managing director and CEO Thampy Koshy is one of the pioneers of the DPI – he says the public-private partnership has created an enabling environment that has made it possible for innovators to build infrastructure that supports the digital transformation.

Unique identification

India Stack consists of three layers, namely identity, payments, and data exchange – each an extension of the other for the greater good of the population. As early as 2009, India began to deal with one of its foundational challenges of ensuring that its 1.4 billion citizens are able to produce some form of identification. In the past, this task was left up to different enterprises, some private, which often made it even more difficult for people in poorer communities to be able to secure an ID number.

Inevitably, digital innovation was used to correct this developmental anomaly.

Through the Unique Identification Authority of India, also known as UIDAI, India has been able to issue unique digital identification numbers known as Aadhaar in Hindi. Aadhaar is sometimes informally referred to as an UIDAI ID or UIDAI number – it is a 12-digit unique identify number that can be obtained by residents of India, based on their biometrics – 10 fingerprints, two iris prints and a photo of the face – and demographic data.

Before the introduction of Aadhaar, hundreds of millions of people did not have the means to prove their identity. In a fast-changing world, this made it difficult for many undocumented people to access welfare benefits, social services, and banking services, among others. The government then embarked on what Koshy calls an evangelisation programme of teaching people about the benefits of attaining an Aadhaar. The digital documentation process has since become the foundation for the digitisation of public social services in India, also providing much-needed data. Once the identity stack was ticked off, the other stacks of data exchanges and greater financial inclusion became possible.

“Having a digital ID has made it easier for mobile companies to verify the identity of people and to give them a mobile number. Similarly, for bankers, it became easier to open a bank account. These three fundamental elements are what we call it the JAM trinity [for Jan Dhan banking, Aadhaar, and mobile], that is, a bank account, Aadhaar or an identity number, and a mobile number,” Koshy explains.

Financial inclusion

One of the domino effects of having masses of undocumented people was that many of them had no access to the formal financial services sector. The penetration of mobile phones has since made it easier for those services to be accessible. People use their unique identity numbers, which are digitally verified, to secure mobile numbers. This then allows them to access financial services.

With the launch of a unified payment interface (UPI) in 2016, India has advanced financial inclusion in the Global South and the developing world. Known as the second layer of the India Stack, UPI is an instant payment system developed by the National Payments Corporation of India (NPCI) that allows users to instantly transfer money between any two parties’ bank accounts. It is a formal payment system regulated by the Reserve Bank of India.

“Through the UPI customer interface, the paying entity and the receiver exchange their details, using a very simple QR-based mechanism. Suddenly, financial transactions are possible at a mass scale. Today at least 40% of the global financial transactions happen in India because of the unified payment infrastructure that has been made available as a public good,” says Koshy.

Some estimate that UPI is being used by more than 300 million people and at least 50 million merchants. According to the NPCI, by 2023, it had settled more than eight billion transactions worth nearly $200 billion, 50% of which are classified as small or micro payments. In the eight years of its existence, UPI has helped India to bridge the income and demographic divide in the country. The growth of unique users has increased exponentially – as of the end of 2023, UPI handles 75% of the retail digital payments volume in India. Still, the upward trend is expected to continue, further boosting the number and value of funds flowing into the formal economy. UPI is aiming for two billion transactions a day by 2030.

The next ‘Stack’ of the DPI includes creating an inclusive ecosystem for e-commerce. The ONDC is tasked with ensuring the democratisation of e-commerce. India recognises the benefit of increasing e-retail penetration – a space that has not always included all the country’s business players. The open protocol – based on open-source specifications – is transforming the way e-commerce functions. Koshy sees the open network for digital commerce as a platform to facilitate the rapid adoption of e-commerce, but also to boost and strengthen the growth of start-ups in India. By facilitating scalable and cost-effective e-commerce through the open protocol, the ONDC will empower start-ups collaboratively.

From India to the world

In his address to the G20 virtual summit in November 2023, Indian Prime Minister Narendra Modi discussed the digital public infrastructure network and its manifestation on the global scale. India held the 2023 presidency of the G20, and Prime Minister Modi used that global platform to share the country’s experiences of DPI. With the creation of the DPI, India has formulated a blueprint that can benefit other countries, especially other developing nations in the Global South.

A 2023 World Bank Report, titled G20 Policy Recommendations for Advancing Financial Inclusion and Productivity Gains through Digital Public Infrastructure, has lauded India’s role in creating and refining DPI. It notes the country’s groundbreaking work in fostering social and financial inclusion. The report also acknowledges that without DPI, it would have taken decades to absorb the hundreds of millions of people into the formal banking sector.

“What we are doing right is that we have a workable DPI. We have also demonstrated that it works at a huge scale. There is nothing better than demonstrating proper digital solutions for population scale problems, and especially a people who previously had very low participation,” says Koshy.

Many countries around the world, especially the developing world, are still trying to overcome some of the challenges that India has managed to resolve using DPI. Since the DPI was created for the good of the public, India’s repository and knowledge is shared freely with others – and they can design their own DPI to address their challenges.

KEY TAKEAWAYS

DPI is a platform that allows future digital growth and advancement through a system of stacking.
Before the creation of Aadhaar, hundreds of millions of people did not have the means to prove their identity.
With the creation of the digital public infrastructure, India has formulated a blueprint that can benefit other countries.