Author: Arvind Panagariya
Publication: The Times of India
Date: June 7, 2023
URL:    https://timesofindia.indiatimes.com/india/the-great-india-stack-story/articleshow/100800349.cms

Its efficiency, access, cost-effectiveness and scale have many countries looking at our digital financial infrastructure as the model to adopt. It is enabling economic inclusion as well

Among the numerous areas that have seen major transformation in India in the past nine years, financial inclusion stands out. Besides taking a long leap under Prime Minister Narendra Modi, India has been historically a pioneer in this area.

Until as recently as two decades ago, policy discourse in this area centered on microfinance and microcredit, promoted through the instrumentality of self-help groups (SHGs). Though Muhammad Yunus of Bangladesh is commonly credited with pioneering microcredit in 1976, in reality, Ilaben Bhatt of Gujarat preceded him by a good four years. As early as 1972, she had founded the SHG known as Self-Employed Women’s Association (Sewa).

The term ‘financial inclusion’ also has had Indian origins. Former Reserve Bank of India (RBI) governor YV Reddy, who was keen to see access to banking services for excluded sections of society improve, first introduced the term in RBI’s 2005-06 annual credit policy statement, elaborating on it in the mid-term review that followed.

Subsequently, in 2010, G20 included financial inclusion within its agenda. Today, financial inclusion is viewed as critical to achieving many of the United Nations Sustainable Development Goals.

India’s digital platforms are integrating financial inclusion with economic inclusion. The govt now routinely makes cash transfers directly to the bank accounts of 110mn or more farm families

In today’s fast-evolving world, even the term financial inclusion has been superseded by ‘digital financial inclusion’ and, going far beyond microfinance and microcredit, includes universal access to and use of formal financial services relating to saving, borrowing, investing, insurance and pension by digital means. It is in the area of digital financial inclusion that India has emerged as the pioneer and undisputed leader during the past nine years.

India’s digital financial infrastructure, known as India Stack, addresses nearly all aspects of financial inclusion using digital technology. The infrastructure is secure, reliable and interoperable among different companies. In terms of efficiency, access, cost-effectiveness and scale, it has no peers around the world.
India Stack effectively ‘stacks’ three different layers of digital infrastructure. Layer 1 is the Aadhaar identity system, which allows electronic verification of identity. It assigns each individual a 13-digit number and links it to their biometric data (fingerprints and retina scan), name, address and mobile phone number, which are securely stored on the servers of the Unique Identification Authority of India (UIDAI).

The ecosystem within this layer allows electronic authentication of identity (e-KYC) and electronic signing of documents (e-Sign). Today, 1.34bn Aadhaar identity holders have access to these services at no cost for transactions requiring proof of identity.

The payments layer

Layer 2 of India Stack is the payments layer formed by platform Unified Payments Interface (UPI), which intermediates secure fund transfers between Aadhaar-linked bank accounts in real time and at no or minuscule cost. As of January, the platform hosted 382 banks.

The system allows hundreds of millions of account holders of these banks to send and receive funds from one another in real time. With merchants operating through Aadhaar-linked bank accounts as well, the system facilitates not just peer-to-peer (P2P) but also peer-to-merchant (P2M) transactions.

Layer 3 of India Stack is the data layer. Once fully implemented, financial information providers (FIPs) such as banks, credit-rating agencies, tax platforms, insurance providers, pension agencies and securities firms would store the transactions data of their customers under their Aadhaar numbers on the platform. Financial information users (FIUs) such as lenders, wealth managers, brokers and wallet firms will have access to these data but not directly.

India’s digital financial infrastructure, known as India Stack, addresses nearly all aspects of financial inclusion using digital technology. It is secure, reliable and interoperable among different companies

Instead, only RBI-regulated account aggregator fiduciaries will have direct access to the platform and would, with the consent of the customer, provide their data to the FIUs in return for a fee.

Data ownership will remain with the customer and the aggregator will simply transfer the data in a secure manner to the FIU without being permitted to store it. The data sharing will speed up transactions such as loan and insurance sales and facilitate targeted marketing.

It is on the back of layers 1 and 2 that digital financial transactions have witnessed an explosive growth in India. From just 4.4% of gross domestic product (GDP) in 2015-16, they have shot up to 76.1% in 2022-23. No surprise that many countries are taking a serious look at the Indian digital infrastructure as the model to adopt.

Even the New York Times , which is known for its uniformly negative coverage of India and Modi, felt compelled to report recently, “Billions of mobile app transactions — a volume dwarfing anything in the west — course each month through a homegrown digital network that has made business easier and brought large numbers of Indians into the formal economy.”

India’s digital platforms are also integrating financial inclusion with economic inclusion. The government now routinely makes cash transfers directly to the bank accounts of 110mn or more farm families. As many as 13.9mn businesses, the vast majority of them unincorporated and small, are registered on its Goods and Services Tax Network (GSTN).

And, in 2022-23, Government e-Marketplace (GeM) has intermediated transactions worth Rs 1.5trn between the 66,000 government-buyer organisations and nearly 6mn sellers and service providers that it hosts. In Amrit Kaal, India is transacting as never before.

-The writer is professor, Columbia University.